Tax Savings For U.S. Residents Selling Canadian Capital Property

“Part of the gain may be exempt from Canadian tax.”

When a U.S. resident sells Canadian capital property that has been owned for a long period, the capital gain may be substantial. If the property was owned before 1984 and it was owned by a U.S. resident throughout the period of ownership, part of the gain may be exempt from Canadian tax pursuant to Article XIII(9) of the Canada-U.S. Tax Convention (1980) (“the Convention”).

In order for the exemption to apply, the U.S. resident must have owned the property on September 26, 1980 and must have been a U.S. resident on that date. Certain other conditions apply. The exemption does not apply if the property was owned at any time after September 26, 1980, and before the time of disposition, by a person who was not a U.S. resident.

For the exemption to apply, the capital property cannot be part of the business property of a permanent establishment in Canada or pertain to a fixed base in Canada. It is not clear whether a rental property is a business property for the purposes of this exemption. The Canada Revenue Agency has indicated that rental activities carried on by an individual are not a business unless the services go beyond those normally associated with the rental of real estate.

Article XIII(9) of the Convention exempts the gain accrued up to December 31, 1984 on the property.

The exempt gain can be determined by either:

  1. Determining the fair market value at December 31, 1984 (an appraisal may be needed); or
  2. Assuming that the gain occurred evenly over the period of ownership.

For example:

Total gain on property from date of purchase $150,000
Total number of complete months owned 454
Total number of complete months owned before January 1, 1985 156
Exempt gain $51,542

The amount of the exemption and a reference to Article XIII(9) of the Convention should be included on form T2062A (compliance certificate) that is usually requested by the purchaser in order to ensure that the required Canadian withholding tax is paid.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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Cadesky Tax