Canada Capital Gains Tax & Attribution Rules vs. U.S.: What American Expats Need to Know
Sky-high real estate prices in Toronto and Vancouver mean more American expats face unexpected U.S. tax bills when selling Canadian property. According to the Canadian Real Estate Association, the average home price in Toronto hit CAD $1.1 million in 2025, while Vancouver reached CAD $1.2 million. Many Americans living in Canada may not realize that their principal Canadian residence could trigger significant U.S. capital gains tax, despite being tax-free in Canada.
Capital gains taxation and attribution rules create unique challenges for U.S. citizens in Canada. The two countries treat property sales completely differently, and these differences can cost you thousands if you don’t plan properly.
How Does Canada Tax Capital Gains?
Canada doesn’t tax your entire capital gain. Instead, only 50% (the “inclusion rate”) is added to your taxable income for 2025. The Canadian government proposed increasing this to 66.67% for gains over CAD $250,000, but deferred implementation until January 1, 2026.
Canadian Principal Residence Exemption
Canada offers a powerful benefit the U.S. doesn’t match: complete tax elimination on principal residence sales.
Requirements:
- Property designated as your principal residence
- You or family members ordinarily inhabit the property
- One principal residence per family at a time
- Must report the sale on your Canadian tax return (even though tax-free)
- Since January 1, 2023: Property owned for at least 12 months
Investment properties, rental units, and vacation homes used for rental receive NO principal residence exemption. Canada taxes 50% of the gain at your marginal rate.
| Property Type | Canadian Tax Treatment |
|---|---|
| Principal residence (100% personal use) | Fully exempt from capital gains tax |
| Investment property (rental, commercial) | Fully taxable (50% inclusion rate) |
| Cottage or vacation home | Taxable unless designated as principal residence |
Estimate My U.S. Tax On A Canadian Home Sale
How Does the U.S. Tax Capital Gains?
The United States taxes capital gains differently, creating complexity for Americans in Canada.
U.S. Section 121 Exclusion
The U.S. offers an exclusion (not a full exemption) under Internal Revenue Code Section 121:
- Single filers: Up to $250,000 of gain excluded
- Married filing jointly: Up to $500,000 of gain excluded
Requirements to Qualify:
- Owned the home for at least 2 of the past 5 years
- Used the home as principal residence for at least 2 of the past 5 years
- Can only claim exclusion once every 2 years
- The 2 years don’t have to be consecutive
Unlike Canada’s full exemption, the U.S. exclusion has dollar limits. Any gain above $250,000/$500,000 remains taxable at capital gains rates (0%, 15%, or 20% based on income). High-income taxpayers may also owe an additional 3.8% Net Investment Income Tax.
Why American Expats in Canada Face U.S. Tax on Principal Residence Sales
This is the critical issue: Canada’s principal residence exemption means NO Canadian tax, but the U.S. Section 121 exclusion only covers up to $250,000/$500,000.
The Problem in Expensive Markets
In Toronto and Vancouver, principal residence gains often exceed $500,000, creating a U.S. tax liability with no Canadian tax to offset.
Example: The Toronto Principal Residence Problem
David and Lisa (married filing jointly) sell their Toronto home:
- Sale price: CAD $1,400,000 (USD $1,033,000)
- Original purchase price: CAD $600,000 (USD $443,000)
- Capital gain: USD $590,000
- Canadian tax: $0 (principal residence exemption)
- U.S. treatment: $590,000 – $500,000 exclusion = $90,000 taxable
- U.S. tax owed (15% rate): Approximately $13,500
The Issue: Since Canada didn’t tax this gain, David and Lisa have NO Foreign Tax Credit to offset their U.S. tax liability. They owe the full $13,500 to the IRS.
Currency Exchange Adds Complexity
You must calculate your gain in U.S. dollars using exchange rates from the purchase and sale dates. Currency fluctuations can create taxable gains even if the property appreciates only slightly in Canadian dollars. Use IRS.gov for historical exchange rates.
The Foreign Tax Credit Problem for Investment Property
For investment properties, Canada taxes only 50% of the gain, whereas the U.S. taxes 100%.
Example: Investment Property Sale
Michael sells a Montreal rental property with a USD $200,000 gain:
- Canadian taxable amount: $200,000 × 50% = $100,000
- Canadian tax paid (45% rate): USD $33,200
- U.S. taxable amount: $200,000 (100% of gain)
- U.S. tax before credit (15% rate): $30,000
The Problem: Michael can claim Foreign Tax Credit for Canadian tax paid, but since Canada only taxes 50% of the gain, it may not fully offset the U.S. tax on 100% of the gain.
What Are Attribution Rules?
Attribution rules prevent taxpayers from avoiding taxes by shifting income or property to family members in lower tax brackets.
Canadian Attribution Rules
| Transfer To | What’s Attributed Back |
|---|---|
| Spouse or common-law partner | All income and capital gains from the property |
| Minor child (under 18) | Income attributed back (not capital gains) |
Key Point: Attribution rules treat both spouses as owners of property for tax purposes, meaning both are jointly responsible for capital gains taxes regardless of whose name is on the title.
U.S. Attribution Rules
The U.S. approach focuses on gift tax rules:
- Transferring property to a spouse is generally tax-free (unlimited marital deduction)
- Transferring property to children may trigger gift tax if over $18,000 per person per year
- The recipient takes a “carryover basis” (your original cost), not a stepped-up basis
When selling Canadian property as a married couple, both spouses are considered owners for U.S. tax purposes. Both parties must report the sale, and both are jointly liable for any U.S. tax that may be owed.
How to Report Canadian Property Sales to the IRS
You must report all Canadian property sales to the IRS, even if the sale was tax-free in Canada.
Required Forms and Steps
- Form 8949 – Sales and Other Dispositions of Capital Assets
- Schedule D – Capital Gains and Losses (summary)
- Form 1116 – Foreign Tax Credit (if Canadian tax paid)
Reporting Process:
- Convert all amounts to U.S. dollars using exchange rates from transaction dates
- Calculate your gain: Sale price (USD) minus adjusted cost basis (USD)
- Include selling costs, improvements, and purchase costs in the basis
- Apply Section 121 exclusion if qualified (principal residence)
- Claim Foreign Tax Credit if Canadian tax was paid (investment property)
Even if your entire gain is excluded under Section 121, you must still report the sale. Failure to report can result in penalties.
Common Mistakes to Avoid
- Mistake 1: Assuming Canadian Tax Exemption Means No U.S. Tax: Canada’s principal residence exemption doesn’t affect your U.S. tax obligations. Always calculate your potential U.S. tax before selling.
- Mistake 2: Not Tracking Your Adjusted Cost Basis: Keep detailed records of the original purchase price (in both CAD and USD, including exchange rates), improvements and renovations (excluding repairs), legal fees and commissions, and closing costs at the time of purchase.
- Mistake 3: Ignoring Currency Exchange Rates: Use actual exchange rates from transaction dates, not approximations. The IRS provides historical rates.
- Mistake 4: Transferring Property to Avoid Tax: Attribution rules in both countries prevent this strategy. Transferring property to your spouse doesn’t reduce your tax liability.
- Mistake 5: Not Filing Form 8949: Assuming “tax-free in Canada = tax-free in U.S.” leads to non-filing. The IRS requires reporting regardless of Canadian tax treatment.
Strategic Planning Tips
If your principal residence gain will exceed the Section 121 exclusion limits:
- Timing: Sell before appreciation pushes gain above $250,000/$500,000
- Maximize Basis: Complete renovations before selling and document all improvements properly
- Conversion Strategy: Convert rental property to principal residence and live in it for 2+ years before selling to qualify for Section 121
For investment properties, use the Foreign Tax Credit strategically, though remember Canada taxes only 50% while the U.S. taxes 100% of the gain.
Essential Documentation
Maintain these records for all Canadian property:
- Purchase and sale contracts with prices in CAD and USD
- Exchange rates used for purchase and sale dates
- All receipts for improvements (not repairs)
- Legal fees, realtor commissions, and title insurance
- Records of any rental income if partially rented
How Greenback Can Help
Selling Canadian property as a U.S. citizen creates complex cross-border tax situations. The interaction between Canadian exemptions, U.S. exclusions, Foreign Tax Credits, and attribution rules requires specialized expertise.
At Greenback, we specialize in helping Americans living in Canada handle these exact situations. We prepare your U.S. return while our Canadian partners handle your T1, ensuring both filings coordinate properly. No matter how complex your Canada-U.S. tax situation may be, we can help.
If you’re planning to sell Canadian property or have already sold and need help filing correctly, contact us. You’ll have peace of mind, knowing that your taxes were done right.
If you’re ready to be matched with a Greenback accountant, click the Get Started button below. For general questions on US expat taxes or working with Greenback, contact our Customer Champions.
Get Help Reporting Your Canadian Property Sale To The IRS
This article provides general information about Canadian capital gains and attribution rules for educational purposes. Tax laws, treaties, and rates are subject to frequent changes. Consult with qualified cross-border tax professionals for advice specific to your situation. This information should not be considered tax advice.
Related Resources
- U.S. Expat Tax Guide for Living in Canada
- Canada vs. U.S. Taxes: Complete Comparison
- U.S. Taxes on Foreign Property: Complete Guide
- How to Avoid Capital Gains Tax on Foreign Property
- TFSA Consequences for Americans in Canada
- How to Move to Canada: Complete Guide
- How to Retire in Canada as a U.S. Citizen
- Foreign Tax Credit Guide
- Dual Citizenship: Taxes for Dual Citizens
