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Canadian Tax Preparation for Canadians Selling U.S. Property (Real Estate)

Canadian residents are required to pay tax on their income from all sources worldwide. Accordingly, your Canadian tax return must include capital gains or capital losses from the sale of your property in the U.S.

Unlike the U.S. where 100% of your capital gains are taxable, only 50% are taxable in Canada. Additionally, a foreign tax credit for U.S. taxes paid may be available.

Your capital gains or losses are reported on Schedule 3 of your T1 Individual Tax Return. The gain or loss is reported In Canadian currency, converted from U.S. currency at the applicable exchange rate.

Tax Due Dates & Payment Dates

You should file your U.S. tax return prior to filing your Canadian T1 personal tax return.

The deadline for filing your Canadian return for a given tax year is April 30 of the following year, unless April 30 falls on a weekend. In that case, your return is due on the first business day following the weekend.

Foreign Tax Credit

Canada and the U.S. have a tax treaty to prevent the double taxation of income, in this case the capital gain on the sale of your U.S. property. The U.S. taxes on the capital gain must be paid first. You may then be eligible to claim a foreign tax credit on your Canadian return for the amount of those taxes (converted to Canadian currency), thereby reducing the taxes payable to the CRA.

Foreign tax credit applications are subject to substantial scrutiny by the CRA. You will be required to provide a number of supporting documents to substantiate your foreign tax credit claim. These documents include your U.S. tax return and an account transcript issued by the IRS to support the tax withheld. Historically, the majority of applications have been challenged by the CRA.

Principal Residence Exemption (PRE)

You may also be eligible to claim the PRE on the sale of your property if your U.S. property was your principal residence. In this case, the capital gain is not included in your income for Canadian tax purposes.

There are five criteria for determining whether your property qualifies as your principal residence:

  1. Your property must be a single residential unit.
  2. You are the owner, or one of the owners, of the property.
  3. The property must be usually inhabited by you or your family members.
  4. You designated it as your principal residence.
  5. You must have owned the property for more than one year.

A vacation property that you use periodically may qualify as a principal residence as long as it’s not used mainly as an income-generating rental property. The vacation property does not have to be your main residence, so it’s possible to have two principal residences, although only one can be designated as a principal residence in a given year.

Only one principal residence per couple, per year can qualify as a principal residence. Therefore, if it is used for your U.S vacation home, it is lost for the respective applicable years for your Canadian home. Additionally, foreign currency exchange rates need to be considered as they can have a significant impact.

A further consideration is whether your vacation property qualifies as a principal residence in the U.S. If not, the gain will only be excluded from Canadian tax. It’s also possible to claim only enough of the exemption on your vacation property in Canada to claim the foreign tax credit and recover the U.S. tax paid.

If you have both a Canadian residence and a U.S. residence, it’s best to consult with a professional who’s experienced in these situations to determine the most favourable treatment of the exemption.

Experienced Tax Preparation Services

It can be complicated, but why make it more difficult than it needs to be?

With the complexities involved in calculating your capital gains or losses, claiming the foreign tax credit, and deciding on the best treatment of your principal residence exemption, you need someone with experience in these circumstances.

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.

If we’ve already prepared your U.S. tax return, it makes sense for us to also prepare your Canadian tax return because we’re already familiar with the sale of your property and have access to all the information required for you to successfully claim your foreign tax credit.

Take the Stress Out of Your Taxes

Our services can be provided in person or virtually through our two offices, located in Calgary and Toronto. Contact us to start the process!