If you are a Canadian resident selling a U.S. property, you should be aware of the U.S. Foreign Investment in Real Property Tax Act (FIRPTA).

FIRPTA generally requires the purchaser, or their agent, to withhold a percentage of the gross selling price and remit it to the Internal Revenue Service (IRS). The purpose of the withholding tax is to ensure compliance with the requirement for non-residents disposing of U.S. real property to file a U.S. federal tax return and report any resulting gain or loss. The withholding tax, based on the gross selling price, is often higher than the actual tax liability, incentivizing sellers to file a tax return to claim a refund of any excess withholding.

The percentage of withholding tax depends on the selling price and the purchaser's intended use for the property, and can be 0%, 10%, or 15%:

  • If the sale price is $300,000 or less and the purchaser intends to use the property as a personal residence (residing there for at least 50% of the days used during each of the first two 12-month periods post-sale), a 0% withholding rate applies. The purchaser must provide an affidavit confirming this intent.
  • If the sale price is $300,000 or less and the purchaser intends to rent out the property, a 10% withholding rate applies.
  • If the sale price is greater than $300,000 but not more than $1,000,000 and the purchaser intends to use the property as a personal residence, a 10% withholding rate applies.
  • In all other cases (including if the sale price exceeds $1,000,000 or the purchaser intends to rent out the property when the sale price is over $300,000), a 15% withholding rate applies.

If you expect the actual tax liability to be less than the applicable withholding rate, you can apply for a reduced withholding rate by submitting a Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, Form 8288-B. The IRS typically takes about 90 days to process this application and issue a withholding certificate indicating the reduced amount. The application requires a U.S. Individual Taxpayer Identification Number (ITIN). If you do not have an ITIN, you must submit a completed Form W-7 with the application. Note that ITINs expire if not used on a federal tax return at least once every three years, so verify your ITIN’s status if previously obtained.

Upon completion of the sale, the purchaser or their agent will issue a Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, Form 8288-A. This form includes details such as the seller’s name, address, ITIN, date of transfer, selling price, and federal income tax withheld. You must attach Form 8288-A to your U.S. federal tax return to claim a credit for the taxes withheld.

Regardless of the withholding rate or whether a gain or loss is realized, you are required to file a U.S. Federal Non-Resident Alien Income Tax Return, Form 1040NR, to report the transaction. Form 1040NR is generally due by June 15th of the subsequent year, if you did not receive U.S. wages subject to withholding (or April 15th if you did). You may request an extension to October 15th by submitting Form 4868, which requires a reasonable estimate of taxes owed. An ITIN is required to file Form 1040NR; if not already obtained, a completed Form W-7 can be submitted with the return. If the property is located in a state with personal income tax, you may also need to file a state tax return, which could have its own withholding requirements.

The country where the property is located generally has the first right to tax real property. Thus, a Canadian resident selling a U.S. property triggers a U.S. federal, and possibly state, tax filing obligation. As a Canadian tax resident, you are also subject to tax on your worldwide income, so the disposition must be reported on your Canadian Individual Income Tax Return. If taxes are paid in the U.S. on a realized gain, you can claim a foreign tax credit on your Canadian return to avoid double taxation.

For assistance with U.S. federal and state personal income tax returns and or forms related to the sale of a property located in the U.S. contact Jay P. Trudell, CPA at (437)-494-4665 or by email jptrudell@jptcpa.ca.