Tax Implications for Canadians Selling U.S. Real Property Under FIRPTA

Canadians owning property in the United States must navigate specific tax obligations when selling real estate, primarily governed by the Foreign Investment in Real Property Tax Act (FIRPTA). Enacted in 1980, FIRPTA ensures that foreign individuals pay U.S. tax on gains from the sale of U.S. real property interests.(en.wikipedia.org)

Understanding FIRPTA Withholding

Under FIRPTA, when a Canadian resident sells U.S. real estate, the buyer is generally required to withhold 15% of the gross sale price and remit it to the Internal Revenue Service (IRS). This withholding is not the final tax liability but serves as a prepayment towards the actual tax owed on the gain from the sale. Certain exceptions apply; for instance, if the property is sold for $300,000 or less and the buyer intends to use it as a residence, the withholding may be reduced or eliminated .(irs.gov)

Filing U.S. Tax Returns

After the sale, Canadian sellers must file a U.S. non-resident income tax return (Form 1040NR) to report the transaction and calculate the actual tax liability. If the tax owed is less than the amount withheld, the seller can claim a refund for the difference. To facilitate this process, sellers need an Individual Taxpayer Identification Number (ITIN), which can be obtained by submitting Form W-7 to the IRS .(uhyvictor.com, ca.andersen.com)

Canadian Tax Obligations

In Canada, residents are taxed on their worldwide income, including capital gains from the sale of foreign property. The gain is calculated in Canadian dollars, considering the exchange rate at the time of purchase and sale. To avoid double taxation, Canada allows a foreign tax credit for the U.S. taxes paid on the gain. However, it's important to note that the inclusion rate for capital gains in Canada is 66.7% for individuals and corporations, affecting the overall tax liability .(uhyvictor.com, barrons.com)

State Taxes and Additional Considerations

Beyond federal obligations, some U.S. states impose their own taxes on the sale of real estate by non-residents. For example, states like California and New York have specific withholding requirements. It's crucial for sellers to be aware of and comply with these state-level taxes to avoid penalties.(firptacanada.ca)

Conclusion

Selling U.S. real estate as a Canadian resident involves navigating complex tax regulations in both countries. Understanding FIRPTA requirements, ensuring proper withholding, and fulfilling tax filing obligations are essential steps in the process. Consulting with cross-border tax professionals can provide guidance tailored to individual circumstances, ensuring compliance and optimizing tax outcomes.(edwardjones.ca, cardinalpointwealth.com)