Blog post

Key Points

• U.S. citizens are subject to IRS capital gains tax on the sale of Canadian property, even if it’s their principal residence.
• The Canada-U.S. tax treaty may provide relief to avoid double taxation, but proper filing is crucial.
• Capital gains on Canadian property must be reported on both Canadian and U.S. tax returns.
• Currency fluctuations can affect the calculation of capital gains when converting proceeds to U.S. dollars.
• Consulting with a cross-border tax advisor is essential to navigate the complexities of capital gains taxes on Canadian property.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

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Question

Hi Phil,

I follow your Americans in Canada Facebook page and have found your posts interesting and useful.  I was wondering if you might have any advice for our filing situation this year.

I’m an American that moved to Canada to marry my Canadian wife in 1990 and have been living here ever since.  I’m all up to date filing FBARs and returns in the US.  I work part time but have a small salary (less than $20,000 CA in 2021).  In 2015 we purchased a rental property, which we sold in 2021, creating about $191,000 in capital gains (according to our US accountant’s calculations).  With our Canadian accountant we decided to put the max amount of money in my RRSP in order to bring the taxation down on our capital gains.  We ended up paying around $10,000 to CRA on those capital gains, which we were happy with.  However, what we did not expect was to have to pay the IRS $15,000 US!  Our accountant (a registered CPA who does American taxes in Canada) was able to bring that down to about $10,000 by changing me from “unmarried” (since my wife is a non-american) to “head of household” since I made money with the capital gains and we still have one child (a 27 year old) qualifying as a dependent for this last filing season.  Our accountant has told us that we can submit this to the IRS but they might not like it and insist that we pay the full amount.

In your experience, is there any other route we could take to reduce the amount owing to the IRS?  We have filed an extension to try to figure this out so we have not paid the bill yet.

I didn’t see any similar topics on your blog so thought this might be a new and helpful question for your readers.  If you have time to answer it, we’d greatly appreciate it.  We may have some US inheritance in the future and may be in the market for a taxation specialist.

XXXXX

Answer

Thanks for the email and for being part of the Facebook group.

Not sure if I have enough information to give some general thoughts, but I’ll do my best:

• I’m assuming the rental property is a US rental property that was sold
• If you both purchased the property it’s odd that he’s not also filing a US tax return (1040NR)
• You didn’t mention where the property was, but you might also have state filings
• I’m also assuming that the $10,000 owing for Canadian purposes was after taking a foreign tax credit for any US taxes paid on your US return

It’s still odd that the US tax on the gain would be more than the tax on the gain in Canada. It might be because of the exchange rate from the time of purchase until now. It also might be because of recapture of previously deducted deprecation on the US side.

Do you have copies of the returns you can send me? Also the questions above.

Thanks for sending over the calculations. When I did the “quick and dirty” calculations I used the average exchange rate for the year and the actual rate they used pushed the gain even higher. Not only that, I didn’t realize so much depreciation was claimed on the returns previously. This is the danger of depreciating properties on the US side against other Canadian income. We often ensure the depreciated loss in each year is disallowed as a passive activity loss, however that’s a little risky if the IRS wants to look at the returns. That being said it’s relatively conservative as the IRS should much rather you don’t claim the loss.

I know the above might be quite technical and confusing, but in summary, the gain does look right.

You’ve likely filed your Canadian returns already, however if you had the opportunity to adjust your Canadian return and reduce the amount of RRSP deduction (the difference would carryforward to future years) you could drive Canadian tax up enough to offset US tax even further. That might help.

Hope that helps a little.

Phil