Important

Selling Canadian Home from US

Selling your former Canadian home while living in the US triggers reporting in both countries. Canada may offer the principal residence exemption for years you lived in the home. The US taxes worldwide capital gains but may offer partial Section 121 exclusion. A Section 116 clearance certificate is required before closing.

Key Points

  • Canada's principal residence exemption covers years the property was your principal residence plus one bonus year.
  • As a non-resident seller, you must obtain a Section 116 clearance certificate before or shortly after closing.
  • The buyer must withhold 25% of the purchase price if no clearance certificate is obtained.
  • The US allows up to $250,000/$500,000 Section 121 exclusion if you lived in the home 2 of the last 5 years.
  • The adjusted cost basis for US purposes should reflect the FMV on your date of US residency or departure from Canada.

Action Items

  1. 1.Apply for a CRA Section 116 clearance certificate well before the closing date.
  2. 2.Calculate the Canadian principal residence exemption based on years of occupancy.
  3. 3.Determine your US cost basis, considering any departure tax deemed disposition adjustment.
  4. 4.Evaluate eligibility for the US Section 121 exclusion based on the 2-of-5-year use test.
  5. 5.Claim foreign tax credits on Form 1116 for any Canadian tax paid on the gain.

Frequently Asked Questions

Can I get both the Canadian principal residence exemption and the US Section 121 exclusion?

Potentially yes, for the years that qualify under each country's rules. The FTC mechanism prevents double taxation on any overlapping gain.

What if I do not get a clearance certificate before closing?

The buyer is required to withhold 25% of the gross purchase price and remit it to CRA. You can recover the excess by filing a Section 116 return.

Related Scenarios

Critical

TFSA US Tax Trap

The Tax-Free Savings Account is tax-exempt in Canada but receives no treaty protection in the US. The IRS classifies a TFSA as a foreign grantor trust, requiring Forms 3520 and 3520-A annually. Failure to file can result in penalties starting at $10,000 per form per year.

Critical

FBAR Filing Requirements

The Report of Foreign Bank and Financial Accounts (FBAR) must be filed by any US person with foreign financial accounts exceeding $10,000 in aggregate at any point during the year. The FBAR is filed electronically with FinCEN, not the IRS, and has its own deadline and penalty regime.

Core

Substantial Presence Test

The Substantial Presence Test (SPT) uses a weighted formula across three years to determine if a foreign national is a US tax resident. If you meet the test, you are taxed on worldwide income. Understanding the SPT is essential for snowbirds and anyone splitting time between Canada and the US.

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