The tax implications for Canadians selling foreign real estate
How are Canadians taxed on foreign property? Find out if you should report the sale on your tax return and what role tax treaties play.
Certified Financial Planner Jason Heath answers two different reader questions about selling foreign real estate in the U.K. and the U.S. Below, find out more about reporting international real estate sales, taxes on foreign property, and Canadian tax treaties with other countries.
The tax implications of selling foreign real estate.
Tax implications of selling U.K. real estate
Ask MoneySense
Recently I inherited a house in the U.K. , and with the pandemic and the resulting downturn in the property market, it has taken three years to sell it. The property is currently under offer, and I would be interested to know if capital gains tax is paid in the U.K or in Canada on any increased value since the probate price was set, or is there a reciprocal tax agreement? I am a Canadian citizen and lived here since 1990.
—Ian
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.
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.
SOURCE: The tax implications for Canadians selling foreign real estate
