Currency Opportunity for Canadians
The current value of the Canadian dollar has presented many Canadians with an opportunity to realize significant capital gains when selling their US real estate. These types of profits would have otherwise been unattainable had the dollar kept its value in the global market. This opportunity is not one that is likely to be seen again for a long time, which is why so many Canadians are cashing out and listing their US properties.
While the potential gains for Canadians can be substantial, the tax ramifications are something that needs to be addressed. There have been recent changes to the U.S. Foreign Investment in Real Property Tax Act (“FIRPTA”), which has come into effect just as Canadians are beginning to cash in.
Prior FIRPTA Legislation
Under the prior FIRPTA legislation the buyer had an obligation to withhold and remit 10% of the gross purchase price to the Internal Revenue Service (“IRS”) at the time of closing where the seller was a non-resident of the US. This obligation was based solely on the purchase price and had nothing to do with the actual gain or loss realized on the sale.
There were two exceptions to this rule.
- The buyer was released from their obligation to remit any amount to the IRS if the purchase price was under $300,000 and the buyer signed an affidavit stating that they would be residing or using the property personally for at least 50% of the time it is in use over the next two years;or
- The seller could apply to the IRS for a withholding certificate prior to the transaction closing. The withholding certificate would indicate either: a reduced amount to withhold based on the actual capital gains tax, or in the event there was no gain or a capital loss that no withholding was necessary.
New FIRPTA Rules
On December 18, 2015 President Obama signed the Protecting American Taxpayers from Tax Hikes Act (“PATH Act”) bringing with it changes to the FIRPTA rules. See our blog on this topic here.
With the PATH Act Congress increased the FIRPTA withholding rate to 15%. The mandatory 15% withholding only applies to sales that have a purchase price of $1,000,000 or more. However, under certain circumstances the 15% withholding can also apply to sales less than $1,000,000.
The new rules and exceptions are broken down as follows:
- The same rule applies to sales under $300,000. No withholding is necessary if the buyer signs the affidavit described earlier;
- If the buyer cannot sign the affidavit there is a 15% withholding on the gross sale price for purchases under $300,000;
- If the purchase price is between $300,000 and $999,999 the withholding rate is 10% of the gross price if the buyer signs the same affidavit as the one described above. The only difference would be the stipulation of the purchase price, but the requirement to reside or use the property for 50% of the time it is in use over the next two years remains the same;
- If the purchase price is between $300,000 and $999,999 and the buyer cannot sign the affidavit, the withholding rate is now 15%; and
- If the purchase price is $1,000,000 or more the withholding is 15% of the gross price.
In all cases the seller still has the opportunity to apply for a withholding certificate so that the actual amount being withheld and remitted to the IRS is not the 10% or 15%, but an amount closer to the actual tax realized on the sale of the property.
The PATH Act brings these changes into effect 60 days after its enactment. This means that the changes apply to all sales closing on February 17th, 2016 or later.
If you are a Canadian that has been thinking about selling your US property, make sure to consult with a cross border expert to discuss your options and receive proper advice on how to deal with these new changes to the withholding requirements.