Canadian Selling US Property: FIRPTA, Capital Gains, and Reporting

A Canadian who sells US real estate faces a three-step tax process: (1) FIRPTA withholding at closing (the buyer withholds 15% of the gross sale price and remits it to the IRS), (2) a US non-resident tax return (Form 1040-NR) to report the actual gain and claim a refund of the excess withholding, and (3) a Canadian return reporting the same gain with an FTC for the US tax paid. The FIRPTA withholding is not the final tax; it is an estimated payment that is reconciled on the 1040-NR.

How much is the FIRPTA withholding?

The general rule is 15% of the gross sale price (not the gain). Exceptions:

• $300,000 or less, buyer will use as a residence. If the sale price is $300,000 or less and the buyer (or a family member) will use the property as a residence for at least 50% of the time in the next two 12-month periods, the withholding rate is 0%.
• Between $300,001 and $1,000,000, buyer will use as a residence. The withholding rate is 10%.
• Over $1,000,000 or no residence use by buyer. The withholding rate is 15%.
• Withholding certificate (Form 8288-B). The seller can apply to the IRS for a reduced withholding amount before closing. The IRS issues a withholding certificate that limits the withholding to the estimated tax on the actual gain (rather than 15% of the gross price). This takes 90 days or more, so it must be requested well before closing.

What is the actual US tax on the gain?

The US taxes the gain on Form 1040-NR. For a non-resident alien (a Canadian who is not a US tax resident), the gain on US real property is taxed as if it were “effectively connected income” under IRC 897, meaning it is taxed at the regular graduated rates, not the flat 30% rate on FDAP income.

• Calculation. Sale price minus adjusted basis (original purchase price in USD, plus capital improvements, minus depreciation if the property was rented) minus selling costs (commissions, transfer taxes, legal fees).
• Long-term vs short-term. If the property was held for more than one year, the gain is long-term capital gain, taxed at 0%, 15%, or 20% depending on the total taxable income. If held for one year or less, the gain is short-term, taxed at ordinary income rates.
• Depreciation recapture. If the property was rented and you claimed depreciation (on Schedule E), the depreciation recapture portion is taxed at 25% under IRC 1250, regardless of how long you held the property.
• State tax. Some states impose their own withholding and income tax on non-resident sellers. Florida has no state income tax. California, New York, and other states with income taxes may require separate state withholding and a state non-resident return.

What do I report on the Canadian return?

Canada taxes Canadian residents on worldwide income, including gains on US real property. The gain is reported on Schedule 3 of the T1:

• Calculation. Sale price in CAD (converted at the exchange rate on the sale date) minus ACB in CAD (original purchase price converted at the exchange rate on the purchase date) minus selling costs in CAD.
• Capital gains inclusion. 50% of the gain is included in income (the standard Canadian capital gains inclusion rate).
• FTC. The US tax paid on the gain (including any state tax) is credited against the Canadian tax on the same gain, using the FTC on Form T2209. The credit is limited to the Canadian tax attributable to the US-source gain.
• Currency gain/loss. If the USD appreciated against the CAD between the purchase date and the sale date, the exchange rate movement is part of the capital gain on the Canadian return. This can increase the Canadian gain even if the gain in USD terms is modest.

What about the Section 116 certificate?

Section 116 of the ITA requires a non-resident selling taxable Canadian property to obtain a clearance certificate from the CRA. This is the Canadian equivalent of FIRPTA, and it applies when a non-resident sells Canadian real property.

When a Canadian sells US property, Section 116 does not apply (the property is not Canadian property). The FIRPTA rules apply instead. If you are a US resident selling Canadian property, the Section 116 certificate guide covers the CRA process.

What about FIRPTA on a vacation rental?

If the property was used as a vacation rental (Airbnb, VRBO), the sale involves two additional layers:

• Depreciation recapture. Any depreciation claimed on the rental portion is recaptured at 25%. If you used cost segregation, the accelerated depreciation creates a larger recapture amount.
• Net investment income tax. US citizens and residents owe the 3.8% NIIT on real property gains. Non-resident aliens generally do not owe NIIT, but there are exceptions for certain non-resident aliens who elect to be treated as residents.

What should I do next?

If you are selling US real property, request a withholding certificate (Form 8288-B) 90 days before closing to reduce the FIRPTA withholding. After closing, file Form 1040-NR to report the gain and claim the withholding as a credit. Report the gain on the Canadian T1 with the FTC.

• Form 8288: FIRPTA withholding, the withholding mechanics
• FIRPTA and cost segregation recapture, the vacation rental version
• Form 1040-NR for Canadians, the US non-resident return
• Section 116 clearance certificate, the Canadian equivalent for selling Canadian property
• How should a Canadian own US property?, the ownership structure question

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.