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As Canadian housing prices have risen significantly over the last few years the tax consequences of selling your primary home for both Canadian and US purpose can be significant. We will discuss below the main cross-border tax consequences of selling your principal residence and how to potential reduce any future taxes owing on the sale.

Please note: before we dive into the technicals of principal residence sales note that this is a general discussion only and the tax rules around this topic can be quite complex and nuanced. Each individual situation should be properly reviewed and assessed by a competent cross-border accountant.

How principal residence sales are treated for Canadian purposes

If a Canadian sells their principal residence and they have lived in that property since the time when they purchased it, in most cases the gain on the sale will be fully tax-free.

In the year of sale they will report the principal residence sale on form T2091 including:

• the address of the property
• the year of acquisition
• proceeds of disposition
• the number of years they have designated the property as their principal residence

Note however that you can only designated one property per year for the exemption and a spouse cannot have also designated another property for any of these years.

If you have used specific years for another principal residence property sale these years will not be available and a portion of your gain will be taxable.

Assuming you have multiple properties you will be able to chose which to designated as you principal residence assuming it has been “habitually inhabited” for those years. Foreign owned principal residences can also be eligible for the exemption.

The T2091 form carries a hefty penalty of $100/month to a maximum of $8,000 if late filed, so make sure to file this form in the year of sale.

How principal residence sales are treated for US tax purposes

When a US citizen or green card holder sells their principal residence they have available to them a specific home sale exemption assuming they meet specific criteria.

In order to obtain the capital gains exemption a US taxpayer will need to have lived in the home for at least 2 out of the last 5 years. If they have met that criteria they will have either a $250,000 (married filing separate or single) or a $500,000 (married filing jointly) capital gains exemption.

The gain and exemption will be calculated using the IRS home sale worksheet and any calculated gain will be reported on schedule D.

How are principal residence sale treated for Americans living in Canada?

As you can see from the discussion above it can be problematic for Americans living in Canada selling their home. Canada allows for a 100% exemption and the US only allows for a maximum of $500,000. In cases where an American couple sells their home and the resulting gain is more than $500,000 they will attract additional US tax.

Let’s use an example to illustrate these transactions:

• American couple living in Canada
• They purchased a home in 2013 for $300,000 when the exchange rate was 1.10 USD/CAD
• They sold the property in 2021 for $1,500,000 when the exchange rates was 1.25 USD/CAD
• They made $100,000 of improvements to the property in previous years when the exchange rate was 1.10 USD/CAD
• They have lived in the property as their principal residence since the time of original purchase.

As you can see from the example above the amount of US tax owing on a principal residence sale can be significant and quite a shock to clients if they did not expect such a result. You’ll noticed that the change in exchange rates can significantly affect the resulting US gain. I have also used the highest capital gains rate and also include NIIT (net investment income tax) into the calculation, however for many the capital gains rate could be between 0% and 20% and the NIIT might not apply if their other income is not significant. Hence the reason why you want a good cross-border accountant to run these numbers for you before you sell your Canadian property.

I know that the example above might seem quite extreme, however given how much properties on the west coast of Canada have appreciated over the last 10 years this situation is not very uncommon.

Is there any planning available to reduce the amount of US taxes owing on a Canadian principal residence sale.

If the property has already been sold there’s likely not much you’ll be able to do to reduce the amount of US taxes owing on your 1040. However, it is possible to further reduce US tax by:

• offsetting the resulting gain by any other prior year losses
• Using passive carryforward tax credits from previous years to offset tax on the gain. However, this will not reduce any NIIT calculated on the sale

If you haven’t sold the property and are looking at planning for the sale there may be some options:

• Of course, if you don’t sell the property you won’t have a gain and therefore will not owe US tax. Often clients will simply keep the property or move out and rent the property. If the property is owned upon death and their total estate is below the US estate tax exemption then no tax will ever be owed on the principal residence. That being said you’ll want to plan for this as there are Canadian and US tax implications to changing the use of a principal residence.
• You can potentially transfer the house to a non-US spouse or relative. This requires lots of legal and tax planning and carries a significant amount of risk. US gift tax returns would also be required for the transfer and Canadian attribution must be reviewed.

As you can see from the discussion above taxation of principal residence sales for cross-border taxpayers can be complex. This article is by no means an exhaustive guide on cross-border property sales, however hopefully it has provided you with some additional insights and information on the subject.

If you have more questions about this topic please feel free to reach out to me via email at phil@philhogan.com.