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Taxation of U.S. Property Sales
Canadian individuals who own U.S. real estate may have taxation issues to deal with on the sale of the property.
The seller of the property is required to pay U.S. tax on the sale of U.S. real property. Administratively, the purchaser is required under U.S. law to withhold 10% of the gross proceeds on the sale of the property and remit the amount to the IRS as an estimate of the tax owing. The 10% does not include any additional state withholding taxes which may be applied. This discussion is exclusive of any state requirements and further information should be obtained form the individual state. The federal withholding requirement does not apply to situations where the purchaser acquires the property for use as a residence and the gross proceeds do not exceed $300,000. The IRS should be contacted to determine if any forms need to be filed on a timely basis to claim this exemption. There is a mechanism to apply to have the withholding amount reduced in cases where the amount withheld exceeds any tax on the gain. The IRS will need to be contacted to obtain additional information on filing requirements. The Canada - U.S. tax convention also provides a mechanism where any gain is reduced in the U.S. by the amount of gain attributable prior to December 31, 1984. The taxpayer must have held the property since September 26, 1980 and remained a Canadian resident throughout the holding period. The amount of exempt gain is calculated by prorating the number of months of ownership before December 31, 1984 over the total months owned. An alternate calculation involves establishing a fair market value at December 31, 1984. The IRS should be contacted as there is probably some form claiming this treaty exemption that should be filed on a timely basis. Should the withholding tax be excessive of the amounts that would be payable if the individual tax rate is applied to the gain, and should any of the above exemptions not be of material assistance, the only way to recover the tax is for the Canadian Individual to file a U.S. non-resident alien income tax return. In order to file a return, the Canadian must apply for an IRS Taxpayer Identification Number immediately (it will take several months to obtain the number) and disclose this number on the income tax return. The IRS form is a W-7 to obtain the number.
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