US Citizen Buying Canadian Property: Tax Implications

There is no Canadian tax triggered by the purchase itself (no transfer tax beyond the provincial land transfer tax that applies to all buyers, and no FIRPTA equivalent on the buy side). The tax issues arise from three sources: (1) if the property is rented, the rental income is Canadian-source income subject to Part XIII withholding or the Section 216 election, (2) if the property is sold, the capital gain is taxable in Canada (with a Section 116 clearance certificate required before the buyer releases funds), and (3) the US taxes the worldwide income of its citizens, so the rental income and capital gain are reported on the US return with an FTC for the Canadian tax paid.

What happens when I buy?

Provincial land transfer tax. Every province charges a land transfer tax on the purchase. In Ontario, the rate is graduated (0.5% on the first $55,000 up to 2.5% on amounts over $2,000,000). In BC, the rate goes up to 5% for the portion over $3,000,000. Toronto charges an additional municipal land transfer tax on top of the Ontario tax. These taxes are not income taxes and are not creditable on the US return (they are part of the cost basis).

• Non-resident speculation tax (NRST). Ontario charges a 25% NRST on residential property purchased by foreign nationals (non-Canadian citizens or non-permanent residents) in designated regions. BC has a 20% foreign buyer’s tax. If you are a US citizen who is not a Canadian citizen or permanent resident, you may owe the NRST on a residential purchase. The NRST is not creditable as a foreign income tax on the US return (it is a property transfer tax, not an income tax).
• GST/HST on new construction. If you buy a newly constructed home or a substantially renovated home, GST/HST applies (5% federal GST, plus provincial HST in some provinces). Resale residential properties are generally exempt from GST/HST.

What about rental income?

If you rent out the property, the rental income is Canadian-source income. As a non-resident of Canada, you have two options:

• Option 1: Part XIII gross withholding. The tenant (or property manager) withholds 25% of the gross rent and remits it to the CRA. This is the default. No Canadian return is required.
• Option 2: NR6 and Section 216 election. You file an NR6 with the CRA before the year begins, estimating your net rental income (gross rent minus expenses). The CRA approves a reduced withholding based on the estimated net income. You then file a Section 216 return after year-end, reporting the actual net rental income and reconciling the tax. This almost always produces a lower tax than the 25% gross withholding.
• On the US side, the rental income is reported on Schedule E of your US return. You claim the Canadian tax paid as an FTC on Form 1116, foreign-source passive category income. The FTC eliminates or reduces the double taxation.

What happens when I sell?

Section 116 clearance certificate. Before the sale closes (or within 10 days after), you must apply to the CRA for a clearance certificate under ITA 116. The Section 116 certificate process involves notifying the CRA of the sale, providing the purchase price, the sale price, and the ACB. The CRA issues a certificate once satisfied that the taxes are paid or secured. If you do not obtain the certificate, the buyer must withhold 25% of the sale price (not the gain) and remit it to the CRA.

• Canadian capital gains tax. The gain on the sale of the property (sale price minus ACB minus selling costs) is taxable in Canada. 50% of the gain is included in Canadian income, and you file a non-resident return (Section 116 return or a Part I return). The tax rate depends on the amount of the gain and whether you have other Canadian income.
• US capital gains tax. The same gain is reported on your US return on Schedule D. 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 your total income. The Canadian tax paid on the gain is credited on Form 1116.
• Currency gain/loss. The US return requires the gain to be calculated in USD. The ACB in USD is the purchase price converted at the exchange rate on the purchase date. The sale price is converted at the exchange rate on the sale date. If the CAD appreciated against the USD during the holding period, the US gain is larger than the Canadian gain. If the CAD depreciated, the US gain is smaller.

Do I report the property on the FBAR or Form 8938?

Real property itself is not reported on the FBAR (the FBAR covers financial accounts, not real property). However, if you hold a Canadian bank account for the rental income, that account is reported on the FBAR.

Form 8938 (FATCA) also does not require reporting of directly held real property. But if the property is held through a Canadian corporation or trust, the interest in the entity is a specified foreign financial asset and must be reported.

What about the principal residence exemption?

If you live in the property as your principal residence, Canada’s principal residence exemption (ITA 40(2)(b)) may eliminate the Canadian capital gain on sale. However, as a non-resident, you can only claim the PRE for years during which you were a resident of Canada and the property was your principal residence. If you were never a Canadian resident, the PRE is not available.

• On the US side, Section 121 provides an exclusion of up to $250,000 ($500,000 for married filing jointly) of gain on the sale of a principal residence, if you owned and used the home as your principal residence for at least 2 of the 5 years before the sale. This exclusion is available regardless of where the property is located (it applies to foreign properties too).

What should I do next?

Before purchasing, check whether the NRST applies in the province (Ontario, BC). If you will rent the property, file an NR6 before the rental year begins. When you sell, apply for the Section 116 clearance certificate before or immediately after closing. On the US side, report rental income on Schedule E and the sale on Schedule D, with FTCs on Form 1116.

• Section 116 clearance certificate, the CRA process for non-residents selling Canadian property
• Cross-border rental income reporting, the NR6/Section 216 election
• How should a Canadian own US property?, the reverse direction
• Canadian selling US property: FIRPTA and capital gains, the US equivalent of Section 116
• Cross-border home sale exclusion, the PRE and Section 121 interaction

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