When Are U.S. Property Taxes Deductible in Canada?

Canadian capital gains tax on a U.S. property

Canadian residents are taxed on their worldwide income. That means if you own or sell property in another country, including the United States, the sale typically has Canadian tax consequences.

In short, selling expenses such as a realtor commission are generally deductible when calculating your capital gain on your Canadian tax return. This applies when the property is a taxable asset—most foreign properties fall into that category.

It is possible for a property outside Canada to be designated as a principal residence for Canadian tax purposes, but that is uncommon for most Canadian residents. In practice, Canadians usually designate their Canadian home as their principal residence because it is often more valuable or more appropriate for that claim.

Do you have to report the sale in Canada?

If the U.S. property was a vacation home or a rental property, you must report the sale on your Canadian income tax return. The selling costs you paid—such as realtor commissions—reduce the proceeds of disposition and therefore lower your capital gain.

You may also deduct acquisition expenses that increase your adjusted cost base. These include legal fees, closing costs, and the cost of capital improvements or renovations that add value to the property. Properly documented acquisition costs reduce the taxable gain when you sell.

All amounts paid or received in U.S. dollars must be converted to Canadian dollars for your Canadian tax filing. The Canada Revenue Agency (CRA) recommends using the Bank of Canada exchange rate on the date of the transaction. The CRA will accept another exchange rate for a specific transaction if the rate is widely available, verifiable, published by an independent provider on an ongoing basis, recognized by the market, and used consistently in accordance with sound business principles. Market providers such as Bloomberg, Thomson Reuters, and OANDA are generally acceptable sources under those rules.

U.S. tax implications of selling property in the U.S.

Selling real estate in the United States also creates U.S. tax obligations. Non-U.S. residents who sell U.S. real property are typically required to file a U.S. tax return and may owe U.S. capital gains tax on the sale. This requirement is common and applies regardless of your citizenship.

Any U.S. tax paid on the sale can usually be claimed as a foreign tax credit on your Canadian tax return, which helps prevent double taxation on the same gain. The foreign tax credit reduces the Canadian tax otherwise payable on that income, subject to the usual rules and limitations.

Rental property income from the U.S.

If you own a rental property in the U.S., you must report rental income and related expenses on both your U.S. and Canadian tax returns. Ordinary rental costs are generally deductible: realtor fees for finding tenants, property taxes, condominium fees, property management fees, mortgage interest, utilities, insurance, and repair costs all reduce rental income for tax purposes.

If the property is used both personally and as a rental, you must prorate expenses based on the number of days the property was rented versus the total days it was available or owned during the year. Only the portion attributable to rental activity is deductible against rental income.

Travel expenses incurred to manage, collect rents or supervise repairs at your rental property may also be deductible. The CRA allows deduction of travel costs to perform property management tasks, though it considers lodging and meals to be personal expenses and generally disallows those as deductions.

In most cases, a realtor commission paid on the sale of U.S. real estate will reduce the capital gain reported in both Canada and the United States. Likewise, properly documented acquisition costs and capital improvements reduce your capital gain when you sell.

Read more about capital gains tax:

• How much is capital gains tax in Canada? — and other reader questions answered
• Can you save on taxes by owning an investment account with your child?
• How to calculate the adjusted cost base of inherited property
• The tax implications for Canadians selling foreign real estate