I am a Canadian currently considering selling a US vacation home. I got some information about what the IRS would take off the sale price (10% if under $300,000, and then I understand I could recover the withheld amount next year if home sold this year. Then I imagine I would have to report the capital gain on my Canadian return?
I appreciate any advice you could provide.
First of all, you should understand that any amount that may be withheld from the sale proceeds is not necessarily the same as the amount you owe the US in tax on the sale proceeds.
On the topic of withholding, here is a summary of the law. Pursuant to 26 USC § 1445, when a nonresident alien sells property in the USA, the buyer must withhold 10% of the proceeds and remit it to the IRS, unless 10% is more than the amount of tax that will be finally owed on the sale, in which case the buyer should only withhold the actual tax liability (but the seller has to obtain from the IRS an advance calculation of the actual tax owed to benefit from this).
The general rule on withholding is subject to a number of exceptions. One exception is that if the buyer purchases the property to use a residence and the cost is less than $300,000, then the buyer is not required to withhold any tax from the proceeds (although they can if they want to). You can receive the entire proceeds in this case. Note that you may still owe tax to the IRS. We are only concerned at this juncture with withholding, not actual tax liability. In practice, the buyer may still withhold in this case because pursuant to 26 CFR 1.1445-2(d)(1), if the buyer does not withhold and then the IRS determines that they are not using the property as a residence, then the buyer is liable for the tax. I am guessing buyers may not want to take that risk.
Now that I have summarised withholding, let's discuss final tax liability.
Pursuant to 26 USC § 897, the disposition of property by a nonresident alien is subject to tax as if the gain were income effectively connected with a US trade or business. This means that the gain is taxed at graduated income tax rates. Alternative minimum tax may possibly also apply. You will need to file Form 1040NR to report the sale, figure the tax owed, and pay it and/or receive a refund of any amount withheld.
Note that withholding is based on the proceeds
but the actual tax is only based on the gain
. The actual tax rate may be more than 10% of the gain, but that could be less than 10% of the proceeds. However, if no tax was withheld because of the exception I mentioned, you may well have tax owing when you file Form 1040NR.
So that deals with your final tax liability to the USA.
As for Canada, you would indeed have a taxable capital gain. Half of your net capital gains are taxable at ordinary income rates in Canada. You can claim a foreign tax credit for your final tax liability to the USA. Note that you cannot claim a foreign tax credit based on the withholding, if any, that was remitted to the IRS. The credit is based on the actual final tax liability as figured on Form 1040NR. The CRA may require you to submit your Form 1040NR as proof that you are claiming the actual final liability and not the withholding amount.
You may also have a filing requirement and tax owing to the US state where the property is located.
That all said, this is just a summary of the laws. There are many exceptions and special cases. From your post, it seems you are very confused about the various requirements here. For that reason, you may want to pay for the services of an accountant or lawyer to help you.