Income Tax
Selling Foreign Property Taxes: Canada
Once the sale of your U.S. property is firm, the following must be completed before filing your U.S. and Canadian income tax returns:
1 Determine the rate of withholding tax, if any, on the sale proceeds. The withholding tax will be withheld by the buyer, or the buyer’s agent, and remitted to the IRS.
2 Complete any required withholding forms and submit them to the IRS.
3 The IRS (U.S. Internal Revenue Service) requires all Canadians who are filing a U.S. tax return to have an ITIN (Individual Taxpayer Identification Number). If you do not already have a valid ITIN, you should apply for one immediately after the closing of your sale.
4 Calculate the amount of the capital gain or loss on the sale. The capital gains tax rate is based on the length of time you owned your property, your income range and tax bracket, and the use of your property (i.e., a vacation home).
U.S. Income Tax Returns
Your U.S. tax return should be completed before filing your Canadian tax returns. Each seller of the property must individually file:
- Personal U.S. federal tax return: Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
- Personal U.S. state tax return, where applicable. Not all states have state income tax.
Additional information and documentation required:
- Your ITIN Number
- Copy of the final 8288-A stamped by the IRS
- Final settlement statements for the sale and the purchase of your property
- Details of capital improvements made during the time you owned the property
- The total number of days you were present in the U.S. during the preceding three years
Canadian Income Tax Return
As a Canadian resident, you must pay tax on all of your worldwide income, including capital gains or losses on the sale of your U.S. property. However, only 50% of your gains are taxable in Canada whereas they are 100% taxable in the U.S.
Other considerations for your Canadian T1 personal tax return:
Foreign Tax Credit
After paying the U.S. taxes on your capital gain, you may be able to claim a foreign tax credit equal to the amount of U.S. taxes paid (in Canadian dollars).
Principal Residence Exemption
Under certain conditions, your property may qualify as your principal residence. If your property qualifies, the capital gain is excluded from income for Canadian tax purposes.
CRA Audit
There is a very high probability that you will be audited by the CRA for any foreign tax credits claimed on your Canadian tax return. The Canada Revenue Agency (CRA) requires specific documentation to support the claim.
Selling Your U.S. Property Can Be Taxing, Eh?
With the numerous considerations involved in filing your U.S. and Canadian tax returns, it’s best to leave the job to professionals.
We’ve provided U.S. and Canadian tax services for many Canadians who have sold their U.S. properties, and understand how to deal with both the IRS and the CRA and minimize your taxes payable.
Our managing partner, Asif, is an an Enrolled Agent (EA) admitted to practice before the IRS and an IRS Certifying Acceptance Agent (CAA). A CAA can assist in the process of identity verification, document verification, and obtaining your ITIN number.
Get Started Today
Our services can be provided in person or virtually through our two offices, located in Calgary and Toronto. Contact us to start the process!
