The tax implications for Canadians selling foreign real estate

Tax implications of selling U.K. real estate

Canadian residents are taxed on their worldwide income, Ian. So, you will definitely have to report the sale of the U.K. property on your Canadian tax return. I will start with the Canadian tax implications.

Canadian taxes on U.K. real estate

The capital gain will be calculated based on the value of the property when you inherited it and the price at which you sell it. The price must be converted from U.K. pounds to Canadian dollars based on the exchange rates at the time of inheritance and sale.

If you paid for any improvements to the property after you inherited it, those costs may be added to the adjusted cost base (ACB). Selling costs paid to an estate agent (realtor) and solicitor (lawyer) as well as any other incidental costs can generally be deducted from the sale proceeds.

Only half of a capital gain is taxable, and with the top tax rate in Canada at just over 50%, you may pay up to 25% Canadian capital gains tax, Ian, if applicable.

U.K. taxes on property sales

In the U.K., non-residents are taxed on capital gains for U.K. real estate. For sales after April 6, 2020, you have to set up an online Capital Gains Tax on U.K. Property account to report it. You can file your own tax return, or you can find a tax agent or accountant in the U.K. to file on your behalf.

Note that, unlike in Canada, where the tax year follows the calendar year, the U.K. tax year runs from April 6 to April 5.

HM Revenue & Customs (HMRC), the U.K. equivalent of the Canada Revenue Agency (CRA), provides an online calculator to estimate U.K. capital gains tax for non-residents. If you had a £100,000 capital gain in 2023, for example, you would have a £94,000 taxable capital gain due to the £6,000 annual exemption. For a capital gain of that size, the tax owing is currently estimated to be £22,550, or about 23% of the total capital gain. This is roughly in line with the top Canadian tax rate on a large capital gain.

Canadian foreign tax credits

Canada allows taxpayers to claim foreign tax credits for tax paid in a foreign country. The purpose is to avoid double taxation.

Article 21 of the Convention Between the Government of Canada and the Government of the United Kingdom of Great Britain and Northern Ireland deals specifically with the elimination of double taxation on income between the two countries. It states:

Subject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions—which shall not affect the general principle hereof—and unless a greater deduction or relief is provided under the laws of Canada, tax payable in the United Kingdom on profits, income or gains arising in the United Kingdom shall be deducted from any Canadian tax payable in respect of such profits, income or gains.

Foreign rental income is also taxable in Canada. It’s often taxable in the country in which it is earned as well. Foreign tax credits will generally avoid double taxation for this income as well.

Canadian taxpayers must report foreign assets and income using Form T1135 Foreign Income Verification Statement. That said, only certain assets and income must be reported. Tax-sheltered accounts and real estate that is for personal use are generally exempt. So, foreign real estate that was not rented out may not need to be reported.

Reporting capital gains in multiple countries

In summary, Ian, capital gains must be reported both in the U.K. and in Canada. Tax paid in the U.K. can be claimed on your Canadian tax return and will likely avoid double taxation, such that a dollar of income tax paid in the U.K. would reduce your Canadian taxes by a dollar. You can reduce the capital gain and associated tax by claiming eligible costs that increase your adjusted cost base and reduce your sale proceeds.

Tax implications of selling U.S. real estate

As mentioned above, Canada taxes its residents on worldwide income. This means income made in other countries is generally taxable in Canada. The U.S. taxes the sale of U.S. real estate by non-residents. So, Mary and Vic, a Canadian selling U.S. real estate can have tax implications in both countries.

What are the U.S. tax implications?

The U.S. government allows exemptions from capital gains tax for real estate in certain circumstances. Similar to the principal residence exemption in Canada, there is a principal residence exclusion in the U.S. It allows a capital gains tax exclusion of up to $250,000 of the capital gain on the sale of a qualifying home. For a couple, the exclusion is doubled to a total of $500,000.

U.S. taxpayers can also postpone paying tax from capital gains if they sell a rental or business property and replace it with a similarly valued property. This is called a like-kind exchange.

The state of Montana even has a capital gains exclusion from the sale of a mobile home park. However, Mary and Vic, there are no capital gains exclusions for Canadian residents selling real estate in Arizona. So, your USD$47,000 capital gain would be taxable to you in the U.S. in the year of sale.

The U.S. distinguishes between short- and long-term capital gains, and it charges different tax rates for each. As long as you have owned the property for more than a year, you will qualify for the lower long-term rate, with a maximum of 20% tax payable.

When you sell the States-side property, a U.S. attorney will be required to withhold and remit 15% of the proceeds as withholding tax to the Internal Revenue Service (IRS). You may qualify for a withholding tax rate of 0%, if the sale price is under $300,000, or at a rate of 10%, if the price is between $300,000 and $1 million. That is assuming the buyer intends to occupy the home as a residence more than 50% of the time over the next two years. You may also be able to apply to the IRS to reduce the withholding tax if the tax payable would be significantly less than 15% of the proceeds.

Regardless, you will have to file a U.S. tax return and report the sale. You may be entitled to a refund or have some additional tax to pay. You will need to apply for a U.S. Individual Taxpayer Identification Number (ITIN) if you do not have one already. It is like a Social Security Number (SSN) for a non-resident (similar to a Canadian Social Insurance Number, SIN, that identifies you for tax purposes).

The U.S. tax withheld is eligible to be claimed on your Canadian tax return as a foreign tax credit. This helps avoid double taxation.

What are the Canadian tax implications for selling U.S. real estate?

You will have to report the sale of the property in Canada as well. You may have had a USD$47,000 capital gain on the sale, but the Canadian capital gain or loss may differ. This is because you need to consider the purchase price in Canadian dollars as well as the sale price in Canadian dollars, based on the foreign exchange rates at those times. If the foreign exchange rate changed significantly, you could have a smaller or larger capital gain in Canada, or possibly even a loss.

The top tax rate in Canada for a capital gain is 27%. So, the U.S. tax is likely to be well below this amount and can be claimed as a foreign tax credit to reduce the Canadian tax payable.

Interestingly, a Canadian resident can claim the principal residence exemption on the sale of a property in the States, or any other country, for that matter. The exemption is available for any property that you ordinarily occupy, not necessarily the place you primarily live. It would be uncommon to claim the principal residence exemption for a vacation property mainly because such properties tend to be valued less than a primary place of residence.

If you claim a principal residence exemption for a U.S. property sale, you are then exposing any other real estate you own to capital gains tax when you sell it. For example, Mary and Vic, ff you owned the Arizona property for 10 years, claiming it would expose 10 years of your Canadian home’s appreciation to capital gains tax in the future.

There’s another drawback to the principal residence claim approach. If you have U.S. tax payable on the sale, but not Canadian tax, you may not be able to recover the U.S. tax paid. The IRS doesn’t care whether you pay tax on the capital gain in Canada, and the U.S. tax is a non-refundable tax credit in Canada.

Selling property internationally

In summary, Mary and Vic, you may have tax withheld upon the closing of the sale of your Arizona property. There is the possibility of filing for an exemption, depending on the intention of the buyer, the sale price and the capital gain. You will have to file a U.S. tax return to report the sale and may have tax to pay or may get a refund. You will have to report the sale on your Canadian tax return and may be able to claim the U.S. tax paid as a foreign tax credit to avoid double taxation.

Read more about capital gains tax on the sale of a property:

• Capital gains explained
• How is capital gains tax determined when a co-owned cottage is sold?
• Is there an exception for capital gains on the sale of a commercial property?
• Can you make a claim for the 1994 capital gains exemption? 

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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