Tax Implications for Canadians selling US property, real estate

As a Canadian, are you aware of the tax consequences of selling your US real estate properties? Most Canadian’s aren’t, even though they are buying US real estate more so than ever before.

Read further to understand the tax implications of Canadians selling US properties.

10% Withholding tax

As a Canadian or a non-resident of America, you are subject to U.S. income taxes when disposing of U.S real estate properties. When you are selling an income earning property, you will be subject to a non- resident withholding tax, which is 10% of the sale price. This is normally payable under FIRPTA (the Foreign Investment in Real Property Tax Act of 1980).

When you file your U.S. tax return to report the sale of your property, the withholding taxes paid can be credited towards the U.S. income tax payable on any gain you may realize on the sale. Note that this amount will be refunded if it exceeds your final U.S. tax liability.

Is there any way for the withholding tax to be reduced?

Luckily, there is a way to reduce withholding taxes paid by Canadians on the sale of US real estate. What you could do is to apply for a withholding certificate before the transfer of property. You should apply for this certificate if you expect your U.S. tax liability to be less than 10% of the sale price. In this certificate you will need to indicate what amount of tax should be withheld by the purchaser rather than the full 10%. Note that the application must be filed before the sale’s closing date.

The IRS normally will process your application within 90 days of receipt if all necessary documents are provided. If a certificate is issued before the transfer of property, the withholding tax may be decreased.

Canadian income tax on the sale of US real estate

As a Canadian resident, you must report and pay tax on your worldwide income. This includes capital gains realized on the sale of US real estate. The gain will be calculated in Canadian dollars such that the actual capital gain or loss reported would include a foreign exchange component in addition to any change in the U.S dollar value of the property.

To prevent double-taxation, you can claim a foreign tax credit for the US income tax paid on the sale on your Canadian income tax return.

Key learning points

- Retain complete records of property purchased and any receipts for capital improvements made so that the U.S tax can be easily determined at the time of disposition.

- Apply for a U.S. withholding certificate on the sale of real estate to lower your withholding tax

- Ensure a U.S. tax return is filed for every disposition of U.S. real property

If you are unsure of what to do, we strongly recommend that you hire a US-Canada tax accountant to help you.