The sale of a real estate property in the United States belonging to a Canadian resident is subject to a 15% tax withholding on the sale price. A residence worth US $400,000 would therefore require you to remit a sum of US $60,000 to the U.S. tax authorities (Internal Revenue Service [IRS]). This amount is withheld directly from the sale price at the time of the transaction by the title agent, who then remits it to the IRS.
There are, however, exceptions. This withholding does not apply if the sale amount is less than US $300,000 (or reduced to 10% for a sale between US $300,000 and US $1 million) and if the buyer signs an affidavit committing to occupy their new residence at least 50% of the time during the two years following the purchase.
This tax rule, called the Foreign Investment in Real Property Tax Act (FIRPTA), allows the IRS to ensure that the seller does not escape their U.S. tax obligations. The good news is that the seller may recover part, or even all, of the tax withholding they were required to pay.
How to recover your money
The 15% rate on the sale price is generally higher than the actual U.S. tax rate, which varies between 0% and 20% of the capital gain. This allows the seller to obtain reimbursement of any amount already paid that exceeds the actual tax owed.
To get their money back, the seller must file a U.S. income tax return. The 15% withholding will be deducted from the tax payable, and the balance will be refunded. This sale does not release the Canadian resident from their obligation to declare the capital gain in Canada. The Canada/U.S. tax treaty, however, allows them to avoid double taxation.
Which forms to fill out?
The 15% withholding is remitted to the IRS through forms 8288 and 8288-A. Once processed, the IRS will return to the seller the form (8288-A), stamped with an approval seal, which the seller will use to file their U.S. income tax return.
The seller must ensure, at the time of the sale, to request a U.S. tax number ITIN (Individual Taxpayer Identification Number). This number is necessary for processing forms 8288 and 8288-A and will later be required to complete their U.S. income tax return.
Certification of Canadian passports
The application to obtain an ITIN must be accompanied by a copy of your passport certified by an authorized agent (“Acceptance Agent”). The good news: our firm Raymond Chabot Grant Thornton is accredited by the IRS to certify your passports quickly.
Our experts also offer the service of preparing the prescribed tax forms as well as the simultaneous preparation of your U.S. and Canadian income tax returns.
