Capital Gains
Canadians Selling U.S. Property: Capital Gains Tax
Upon the sale of your U.S. property, the proceeds will be subject to a withholding tax. FIRPTA requires the purchaser to withhold and remit this amount to the IRS.
The prescribed withholding tax is 15% of the proceeds, but you may be eligible for certain withholding reductions or exemptions if the property is your residence or vacation property.
The purchaser must also be an individual, and they or a member of the purchaser’s family:
- Intends to use the property as a personal residence.
- Intends to reside at this residence for a minimum of 50% of the time each year for the first two years following the purchase date.
- Will sign a residential use affidavit confirming the above.
The withholding tax for any other type of property, or for purchasers who do not meet the criteria, is 15%.
Withholding Rates & Exemptions
The following rates apply if the conditions are met.
- Sale price less than $300,000: This sale qualifies for an exemption from withholding taxes.
- Sale price from $300,000 to $1,000,000: The withholding rate is reduced from 15% to 10%.
Withholding Reduction Based on U.S. Taxes Owing
You can also apply for a reduction of the withholding tax in the following situations:
- The amount of your total maximum U.S. taxes will be less than the withholding amount.
- You sold your property at a loss.
You will need to apply for a reduction by completing and submitting Form 8288-B to the IRS by the date of closing. If your application is for a reduced withholding, you must include a calculation of the anticipated capital gains tax to substantiate your claim to the IRS.
How to Calculate the Capital Gain When Selling U.S. Property
The capital gain is the sale proceeds, less:
- The original price you paid.
- The amount you invested in improvements during the time you owned your property. This doesn’t include decorative improvements, but capital improvements like roofing, landscaping, or additions to your home.
- Selling costs associated with the closing of the sale.
Capital Gains Tax Rates for Non-Residents
The tax rate on your capital gains involves three factors:
1 How Long You Have Owned Your Property
Short-term capital gain: ownership for up to 365 days. This will be treated as ordinary income and taxed as such. The assumption behind this treatment is that your intent might have been to simply flip the property.
Long-term capital gain: ownership for more than 365 days. This will qualify for a preferential capital gains rate.
2 Your Income Range & Tax Bracket
The total amount of your U.S. income determines your tax bracket. The tax rate for short-term capital gains ranges from 10-37%. The long-term rate will be 20% or less.
3 The Use of Your Property
Canadians selling property in the U.S. are, in most cases, selling vacation homes. In that case, the above rates apply to the sale.
If you are also a U.S. citizen or resident, or under other certain use tests, you may qualify for a full or partial exemption from the capital gains tax.
Selling Your U.S. Property at a Loss (Capital Loss)
If you sold your U.S. property at a loss, you can apply for a reduction of, or exemption from, the prescribed withholding tax. To do so, you are required to complete and submit Form 8288-B (Application for Withholding Certificate) prior to the closing date of the sale.
Tax Filing to Report the Sale of Your U.S. Property
1 Report the Sale on Your U.S. Federal and State tax returns
Your U.S. tax returns are filed in the tax year following the sale of your property.
You must have an Individual Taxpayer Identification Number (ITIN) to file your tax returns. Once you file, you can get a refund of any withholding in excess of the amount of taxes owed.
2 Report the Sale on Your Canadian Tax Return
Gains or losses on the sale of your U.S. property must also be reported on your Canadian personal tax return since, as a Canadian resident, you pay tax on the total of your worldwide income.
Currently, 50% of capital gains are taxable in Canada. Also, if you have paid tax in the US, you may be able to claim a foreign tax credit in Canada for U.S. income taxes paid. CRA will request a U.S. tax transcript and proof that taxes were paid before allowing the credit.
Selling Your U.S. Property Can Be Taxing
Calculating the capital gain or loss on the sale of your U.S. property isn’t always as easy as it sounds, and you might end up paying more tax than necessary. When you work with us you can just relax, knowing that your gain or loss is accurately calculated. Let FIRPTA CANADA INC. (the busy beavers) handle your tax calculations and all your FIRPTA requirements.
We will also:
- File all required forms relating to FIRPTA.
- Provide your title or escrow company with all required FIRPTA documentation.
After the closing of your sale, we will do the following:
- Assist you in obtaining an ITIN (Individual Taxpayer Identification Number) for each of the owners of the property.
- File the U.S. federal and state tax returns, and Canadian tax returns for each seller.
As an IRS Certified Acceptance Agent, we’ve helped many people just like you obtain an ITIN number so they can achieve their goals.
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Our services can be provided in person or virtually through our two offices, located in Calgary and Toronto. Contact us to start the process!
