Following the crash of the real estate market in 2008, US real estate has been an attractive investment opportunity for investors from all over the world, including Canadians. Although the old adage of “real estate prices always go up” has been proven wrong, one of the major benefits of owning real property is still the appreciation of property values. As a Canadian owner of US property you will face many tax requirements. This article focuses on the US taxes payable by Canadians on real estate sales in the US.
Foreign Investment Real Property Tax Act (FIRPTA)
Did you know that Canadians selling US real estate will be on the hook for the FIRPTA withholding tax? According to the IRS, the disposition of a US real property interest by a foreign person is subject to the FIRPTA income tax withholding. Specifically, if you are a foreign person and your property sale price is greater than $300,000, the purchaser of the property will be required to withhold and submit to the IRS 10% of the gross sale price.
This is a huge tax implication for Canadians disposing of US properties.
Withholding Certificate Reduces Taxes Payable by Canadians Selling US Properties
The amount that must be withheld from the disposition of a US real property interest can be adjusted pursuant to a withholding certificate issued by the IRS. You can apply for a withholding certificate by filing Form 8288-B with the IRS. A withholding certificate will be approved and issued if the IRS determines that your maximum tax liability will be less than the 10% withholding rate.
The withholding certificate can be requested by you (the seller), the purchaser, or the purchaser’s agent. The IRS will generally process these requests within 90 days of receiving a complete application.
Submitting an incomplete application may result in delays and having to pay the standard withholding tax.
Please note that in order to complete the application you will need the Taxpayer Identification Numbers (TINs) for all parties involved in the transaction. If you do not have an Individual Taxpayer Identification Number (ITIN), you will need to apply for one by attaching Form W-7, Application for IRS ITIN, along with your withholding certificate application.
When do I have to file the withholding certificate application by?
The withholding certificate application must be submitted before or on the settlement date. If, on the date of closing or transfer of property, a withholding certificate application has been submitted, the actual withholding tax does not have to be paid until the 20th day after the day that the IRS mails you the withholding certificate or the notice of denial. So it is imperative that you or the purchaser file the application for the withholding certificate on time.
What if I don’t submit the application on time?
If you do not submit the application on time or if the IRS denies your application, the withholding agent will be required to pay the 10% FIRPTA withholding tax to the IRS. However, by filing your US tax return the IRS will calculate your actual tax liability on the sale of your US real property. If it turns out that the FIRPTA tax was greater than your actual tax liability, you will receive a refund for any overpayment of tax.
It is very important for Canadians buying property in the United States to educate themselves prior to making investments. Please contact your cross-border tax expert for guidance when you decide to sell US property.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.