Owning property in multiple countries can lead to complex tax issues, especially if you're a dual resident. When selling property, you may face taxes in both countries, which can result in double taxation. However, tax treaties like those between Canada and the U.S. or the U.K. can help mitigate this. Here's what you need to know:
- Canada taxes worldwide income for residents, including 50% of capital gains from property sales.
- Non-residents pay tax only on Canadian-sourced income, with a 25% withholding tax on property sales.
- Dual residents risk double taxation but can use tax treaties to claim foreign tax credits and reduce liabilities.
- Nova Scotia recently increased the non-resident deed transfer tax to 10% as of April 1, 2025, adding to the costs for non-resident property owners.
Tax treaties provide relief:
- Canada–U.S. Treaty: Allocates taxing rights based on property location and offers foreign tax credits.
- Canada–U.K. Treaty: Similar provisions, with Canada retaining primary taxing rights for Canadian property.
Without a treaty, you may face full taxation in both countries, stricter withholding requirements, and higher compliance burdens. Always consult a cross-border tax expert to avoid costly mistakes and ensure compliance.
Can You Be Tax Resident of 2 (or more) Countries?
Tax Rules for Dual Residents
Understanding how Canada taxes property sales for residents, non-residents, and dual residents can be a challenge, especially when someone holds tax residency in multiple countries at the same time.
Canadian residents are taxed on their worldwide income, which includes capital gains from property sales [2]. When selling property in Canada, residents must include 50% of their capital gains in their taxable income [4]. A recent announcement on March 21, 2025, confirmed that the proposed capital gains rate increase has been cancelled. This means that for individuals, capital gains up to $250,000 will continue to be taxed at the 50% inclusion rate [4], providing some clarity for investors.
Non-residents, on the other hand, are only taxed on income sourced from Canada [2]. When a non-resident sells Canadian property, they are subject to a 25% withholding tax on certain types of Canadian-source income [7]. Additionally, half of the capital gains from the sale of Canadian real estate is subject to Canadian tax, regardless of the seller’s residency status [8].
For dual residents, the situation becomes far more complicated. Individuals who hold tax residency in more than one country may face tax obligations in both, which can lead to double taxation [3]. This issue stems from differences in how countries determine tax liability. For example, the U.S. taxes individuals based on citizenship, while Canada taxes based on residency [3].
Adding to this complexity are provincial taxes, such as those in Nova Scotia. As of April 1, 2025, the province increased its non-resident deed transfer tax from 5% to 10% [6]. This tax is aimed at giving local buyers an edge over non-residents. Nova Scotia Finance Minister John Lohr explained:
"If a Nova Scotian is bidding for a home and someone else is bidding on it as a cottage, we want that Nova Scotian to have a slight advantage and that's what that non-resident deed transfer tax is - a slight advantage for a Nova Scotian" [6].
However, this tax has sparked concerns within the real estate industry. John Duckworth of Duckworth Real Estate referred to it as a "don't come here" tax [6], arguing that it could force sellers to lower their prices to counterbalance the tax, potentially affecting property values across the province [6].
Beyond tax rates, dual residents must also navigate reporting requirements like form T1135. If you own "specified foreign property" with a total cost exceeding CAD $100,000, you’re required to file this form with the Canada Revenue Agency [5]. This includes real estate outside Canada (excluding personal-use property), shares in non-resident corporations, and foreign-held funds [5].
To avoid double taxation, foreign tax credits play a key role for dual residents [3]. Generally, Canadian residents pay taxes in Canada first and then report the same income to foreign tax authorities, claiming credits for taxes already paid in Canada [3]. Knowing which country has primary taxing rights and claiming these credits accurately is essential to reducing tax liability.
Given the complexity, seeking professional guidance is highly recommended. Cross-border financial advisors and accountants with expertise in multiple jurisdictions can help navigate these challenges, ensuring compliance with tax laws while minimizing liabilities [3]. This is especially important for property sales, where the stakes - and tax obligations - can be substantial.
1. No Tax Treaty
When dual residents sell property in Canada, the absence of a tax treaty between Canada and their other country of residence introduces the risk of being taxed twice. Without treaty protections, both countries may claim taxing rights over the same transaction, creating a heavy compliance burden.
Taxing Rights
In situations without a tax treaty, Canada taxes dual residents on income sourced within its borders. Meanwhile, the other country may impose taxes based on its own residency rules, leaving individuals caught between two systems.
Double Taxation Relief
Without an agreement to define taxing rights, dual residents have no formal way to avoid double taxation. This lack of relief mechanisms significantly increases the financial strain of property sales.
Withholding Requirements
The complications don’t stop there. When no treaty exists, withholding rules become more stringent. If a seller is classified as a non-resident for withholding purposes, the buyer is required to withhold 25% of the sale proceeds - or even 50% for certain types of property - unless the seller obtains a Certificate of Compliance from the Canada Revenue Agency (CRA) [9]. To get this certificate, sellers must complete Form T2062 and provide either payment or acceptable security to cover the estimated tax liability [9].
Compliance Steps
Dual residents must follow strict steps to meet their tax obligations. Sellers are required to notify the CRA within 10 days of selling the property [9]. Missing this deadline results in penalties of $25 per day, with a minimum penalty of $100 and a maximum of $2,500 [9].
The notification process involves submitting the correct form based on the type of property sold:
- Form T2062: For most property types.
- Form T2062A: For resource properties.
- Form T2062B: For life insurance policies [9].
Additionally, sellers must file a Canadian tax return to report the sale [9]. Each step must be completed to ensure full compliance with Canadian tax laws.
2. Canada–United States Tax Treaty
The Canada–United States Tax Treaty provides a structured framework for handling property sales by dual residents, though it doesn’t entirely eliminate the complexities involved. With the significant number of people navigating cross-border residency, this treaty plays an important role in clarifying tax obligations.
Taxing Rights
The treaty lays out specific rules about which country has the right to tax different types of property sales. If you sell real property located in either Canada or the U.S., the country where the property is situated has the right to tax the gains, no matter where you live[12]. For business assets tied to a permanent establishment, the country where the business operates taxes the gains. Meanwhile, gains from other personal property are taxed based on the seller’s country of residence[12].
One notable provision applies to capital assets owned as of September 26, 1980. In such cases, any tax is only levied on the appreciation that occurred after 1984[14]. These rules help clarify the allocation of taxing rights, setting the foundation for the treaty’s measures to address double taxation.
Double Taxation Relief
A key goal of the treaty is to prevent individuals from being taxed twice on the same income. Both Canada and the U.S. offer foreign income tax credits to offset taxes paid in the other country[15]. For example, if you pay tax in Canada on a property sale, you can generally claim a credit for that tax on your U.S. return - and vice versa.
"Under the treaty, both the US and Canada allow a foreign income tax credit for any income tax paid to the other country."
However, relief may not completely eliminate double taxation, so careful planning is essential[13]. For U.S. citizens living in Canada, there’s an additional advantage: foreign tax credits earned on Canadian investment income can be used to offset the U.S. Net Investment Income Tax (NIIT)[10].
Withholding Requirements
The treaty also outlines specific withholding rules for property sales. For non-residents selling Canadian real estate, a 25% withholding tax applies to the gross proceeds[16]. This rate will rise to 35% for transactions closing on or after January 1, 2026[16].
In the U.S., Canadian residents selling real estate are subject to FIRPTA rules, which impose a 15% withholding tax on the gross proceeds[11]. However, there’s an exception: if the property sells for USD $300,000 or less and the buyer plans to live in the home for at least 50% of the time over the next two years, the withholding tax may not apply[11].
Compliance Steps
Selling property requires following strict compliance procedures and meeting deadlines. For Canadian property sales, you must apply for a Certificate of Compliance (Form T2062) within 10 days of closing[16]. Missing this deadline results in penalties of $25 per day, up to a maximum of $2,500 per seller[16].
Before submitting Form T2062, you’ll need a Canadian Tax ID, such as a SIN or ITIN. If you don’t have one, you must apply using Form T1261[16]. The real estate lawyer holds the withholding amount in trust until the CRA processes and issues the Certificate of Compliance[16].
Be prepared for delays, as CRA processing can take 8 to 12 weeks or longer[16]. To avoid complications, it’s best to file the T2062 application as soon as possible, rather than waiting until the last minute.
In addition, you’ll need to submit a non-resident Form T1 Individual Income Tax Return by April 30 of the year following the property sale[16]. If the final tax owed is less than the amount withheld, the CRA will refund the difference.
On the U.S. side, completing a 1040 federal tax return is necessary to claim treaty benefits[15].
If you’re a Quebec resident, there are extra steps to consider. Non-residents selling real property in Quebec must obtain a clearance certificate and meet specific filing obligations with Revenu Québec[16].
sbb-itb-16b8a48
3. Canada–United Kingdom Tax Treaty
The Canada–United Kingdom Tax Treaty lays out clear guidelines for managing tax obligations for individuals who are residents of both countries. It ensures that Canada retains the right to tax gains on real estate located within its borders while addressing the challenges of dual residency. Given the strong ties between the two nations, the treaty simplifies complex tax scenarios and provides clarity on key issues like taxation rights, relief from double taxation, withholding rules, and compliance requirements.
Taxing Rights
The treaty specifies how taxing rights are distributed between the two countries, particularly for capital gains on real estate. Canada holds the primary right to tax gains from the sale of Canadian real property, regardless of whether the seller is considered a UK resident. According to Article 13 of the treaty, gains from selling real property are taxable in the country where the property is located[18]. This provides dual residents with a definitive understanding of Canada’s authority to tax such transactions, even if the UK considers them residents for other income purposes.
While the UK typically does not tax non-residents on gains from Canadian property, UK residents are still required to report their worldwide income, including income from foreign property sales, on their tax returns.
Relief from Double Taxation
To prevent individuals from being taxed twice on the same gain, the treaty allows for a foreign tax credit mechanism. If both Canada and the UK have the right to tax the same capital gain, the UK will provide a credit for any Canadian tax already paid. For example, if you pay tax in Canada on a property sale, this amount can be credited against your UK tax liability, potentially reducing it to zero. This system is further simplified by the fact that both countries use similar calculations for capital gains.
Withholding Rules
The treaty also addresses withholding tax requirements, which can create immediate cash flow challenges for property sellers. Canada’s withholding tax rules apply to UK residents in the same way they apply to other non-residents. Typically, 25% of the gross sale price is withheld unless you obtain a clearance certificate from the Canada Revenue Agency (CRA)[18]. For instance, on an $800,000 sale, $200,000 may be withheld until the certificate is secured. This can significantly impact cash flow, especially for those investing in larger projects, such as multi-unit developments with companies like Helio Urban Development in Nova Scotia.
Adding to this, Nova Scotia has increased its non-resident deed transfer tax to 10% of the property value, effective April 1, 2025, doubling the previous rate of 5%[1][17]. This change is something non-resident property owners need to plan for carefully.
Compliance Procedures
Navigating compliance requirements under the treaty involves meeting deadlines in both Canada and the UK. For Canadian purposes, you must obtain a clearance certificate from the CRA before the sale closes to ensure the correct amount of tax is withheld. After the sale, you’ll need to file a Canadian tax return to report the actual gain and potentially claim a refund if the withheld amount exceeds your tax liability.
In the UK, you must report the sale on your tax return and claim a foreign tax credit for the Canadian tax paid. Accurate documentation, including proof of Canadian taxes paid and proper currency conversions based on the sale date, is crucial.
It’s important to note that the benefits of the treaty aren’t automatic. To take advantage of them, you’ll need to actively file the necessary forms and supporting documents. Given the complexities involved, working with a cross-border tax specialist familiar with both Canadian and UK tax systems can help you navigate these requirements, maximise relief options, and ensure compliance with both jurisdictions.
Pros and Cons
Navigating the pros and cons of various tax treaty scenarios is essential for dual residents looking to make informed decisions about property sales and manage their tax responsibilities. Each situation comes with its own set of challenges and benefits, which can significantly affect financial outcomes.
| Criteria | No Tax Treaty | Canada–United States Tax Treaty | Canada–United Kingdom Tax Treaty |
|---|---|---|---|
| Taxing Rights | Both countries may claim full taxing rights, creating uncertainty. | Tie-breaker rules determine primary residency, reducing jurisdictional conflicts. | Canada retains primary taxing rights over its real estate, with mechanisms to avoid double taxation. |
| Double Taxation Relief | No formal relief mechanisms; risk of paying full tax in both countries. | Foreign tax credits provide a dollar-for-dollar offset of taxes paid, reducing double taxation. | A foreign tax credit system prevents double taxation, with aligned capital gains calculations simplifying the process. |
| Withholding Requirements | Unclear procedures may result in excessive withholding. | FIRPTA imposes a 15% withholding on U.S. real estate sales, with established clearance processes available. | Standard domestic withholding procedures apply. |
| Compliance Complexity | High complexity with ambiguous filing requirements in both jurisdictions. | Moderate complexity; requires accurate filing of US Form 1040 and IRS Form 8833 to claim treaty benefits. | Moderate complexity; proper filing is needed to claim foreign tax credits. |
| Estate Tax Implications | No protection or exemptions under either jurisdiction. | Tax credits can reduce U.S. estate tax liability, particularly with the exemption for estates under US$13,990,000. | Generally offers favourable treatment with established procedures. |
The table above highlights the key differences, and the following discussion delves into each treaty's practical impact. Without a tax treaty, dual residents face heightened tax risks and more complicated filing requirements.
The Canada–United States Tax Treaty provides relief by reducing conflicts through foreign tax credits. For instance, the December 2024 ruling in Paul Bruyea's case demonstrated how the treaty assists in resolving jurisdictional tax disputes. With about 800,000 Canadians living in the United States and nearly 1 million Americans residing in Canada[14], this treaty addresses real-world cross-border tax challenges. Article XXIV, titled "Elimination of Double Taxation", serves as the backbone of these relief provisions[10][19]. However, compliance can be demanding, requiring precise filing of US Form 1040 and IRS Form 8833 to claim treaty positions.
The Canada–United Kingdom Tax Treaty simplifies tax processes by granting Canada primary taxing rights and enabling foreign tax credits. The alignment in capital gains calculation methods between the two countries further eases the process, although standard domestic filing rules still apply.
Each treaty's strengths and limitations, as outlined in the table, underscore the importance of systematic approaches to avoiding double taxation. These agreements allow taxpayers to claim credits for taxes paid in the other jurisdiction, provided specific conditions are met[10][15].
For property owners eyeing larger investments, such as multi-unit developments, understanding cross-border tax implications is vital for financial planning. For example, companies like Helio Urban Development in Nova Scotia, which focuses on building fourplexes and larger rental properties, often work with clients who need clarity on how property sales might affect their tax obligations when securing funding for new projects.
Conclusion
Dual residents often face intricate tax challenges. Tax treaties can shield individuals from double taxation, but without them, property owners may be fully taxed in both countries.
Take the 2015 case involving Bruyea as an example. He was initially hit with nearly $2 million in Canadian taxes and $1.6 million in U.S. taxes on the same gain[10]. However, the U.S. Court of Federal Claims ruled in his favour, allowing him to use Foreign Tax Credits from Canada to offset his U.S. tax liability. Max Reed, his Vancouver-based tax counsel, commented:
"This case is far from over and the United States will likely appeal, but for now double taxation has been dealt a serious blow"[10].
This case highlights the importance of strategic tax planning. With professional advice, taxpayers can leverage treaty provisions - such as those in the Canada-U.S. Tax Treaty - to significantly reduce their tax burdens. In fact, about 75% of American expats, including dual citizens, owe no U.S. taxes after applying treaty benefits and credits[20].
For Nova Scotia property owners, understanding cross-border tax implications is crucial. Whether selling properties to fund new investments or managing rental income, the interplay between federal treaties and provincial tax rules can heavily impact financial outcomes.
Each treaty offers varying degrees of protection. For instance, the Canada-U.S. and Canada-U.K. treaties provide relief through foreign tax credits and tie-breaker rules. On the other hand, the absence of a treaty leaves owners exposed to full taxation in both jurisdictions. These considerations underscore the need for expert guidance.
"Everyone's tax situation is unique. Therefore, it is important to speak with your tax advisor for further discussion and analysis before implementing any tax planning strategies."[5]
FAQs
How can dual residents reduce double taxation when selling property?
Dual residents looking to sell property can reduce the risk of double taxation by leveraging tax treaties between countries. These agreements often outline which country has the primary right to tax capital gains and may let residents claim foreign tax credits for taxes already paid elsewhere. A good example is the Canada-U.S. Tax Treaty, which offers ways to avoid being taxed twice on the same property sale.
By carefully reviewing treaty provisions, dual residents can plan their sales to take advantage of lower withholding taxes or even exemptions. To navigate this process effectively and ensure compliance, it's wise to consult a tax professional who understands the details of the applicable treaty.
How does Nova Scotia's increased non-resident deed transfer tax impact dual residents?
Changes to Nova Scotia's Non-Resident Deed Transfer Tax
Starting 1 April 2025, Nova Scotia will double its non-resident deed transfer tax from 5% to 10%. This increase will directly affect dual residents who are classified as non-residents under the policy, leading to higher expenses when purchasing property in the province. The added costs could shape investment choices and potentially deter some individuals from pursuing property ownership in Nova Scotia.
For those planning to invest in or develop rental properties, these changes are an important consideration. Factoring in the increased tax burden is crucial to accurately assess the financial viability of your investment strategy. Understanding how this tax adjustment fits into your broader plans can help you make better-informed decisions.
What should dual residents know about their tax obligations when selling property in Canada without a tax treaty?
Dual residents who sell property in Canada without the benefit of a tax treaty need to be aware of an important rule: Canada has the right to tax the sale of Canadian real estate. This means you must report the sale on a Canadian income tax return and pay capital gains tax, which is generally calculated on 50% of the profit from the sale.
To navigate these requirements effectively, it’s a good idea to work with a tax professional who understands Canadian tax laws. They can assist with filing the necessary paperwork and flag any additional responsibilities, such as the Underused Housing Tax or other local levies. By taking these precautions, you can avoid penalties and make the property sale process much smoother.
