- The Canada-U.S. Tax Convention allows the U.S. to tax gains from selling U.S. real property, and Canada gives a deduction for U.S. income tax paid on U.S.-source income.
- You still report the sale in Canada, converting figures to Canadian dollars at the rates the CRA sets out.
- The withholding rules and the process to reduce or recover an amount come from US law, so a US tax adviser should confirm them before closing.
You have agreed to sell your US vacation home or rental, and then you learn the buyer or closing agent will hold back part of the price for US tax. That can be a surprise, especially when the amount held is large compared with your actual profit.
This article explains the general picture for an Ontario seller and focuses on what happens on the Canadian side. The withholding rules themselves, including rates and the steps to reduce or recover an amount, are US rules, so they are best confirmed with a US tax adviser early.
Why a buyer may withhold from your price
Holding back part of the price at closing is a US withholding matter. How it applies to your sale, including whether any part of the price is held back at closing, is a US question that is worth confirming with a US tax adviser or the closing agent.
This fits with the treaty. Gains from selling real property in the U.S. may be taxed in the U.S. under Article XIII of the Canada-U.S. Tax Convention.
The exact percentage held back, the exceptions and the forms used to ask for a reduction are not covered here because they depend on US law. Ask your US adviser or the closing agent about them as soon as you have a signed agreement, since timing can matter.
Withholding is not the same as your actual tax
How any amount held at closing compares with the tax actually owed is a US question, and a US tax adviser can explain it for your sale. Whether the amount can be reduced before closing, or recovered afterward through a US return, is also a US question. Do not assume that the amount held is the final tax, and do not assume it can be recovered without paperwork.
On the Canadian side, a capital gain is the proceeds of disposition minus the property's adjusted cost base and any outlays and expenses of selling it. Knowing your cost base and selling costs early helps both countries' calculations.
Reporting the sale in Canada
You report capital gains and losses on Schedule 3, and the taxable capital gain goes on line 12700. The capital gains inclusion rate for 2025 is 50%, so half of a capital gain is taxable. For a later sale year, check the current year's CRA guide before relying on that rate.
Because the property is in US dollars, convert the proceeds at the exchange rate in effect at the time of the sale. Convert the cost base at the rate on the purchase date, and expenses at the rate when they were incurred. This can create a gain or loss in Canadian dollars that differs from the US dollar result.
If the property was rented, there may be more to report. Recapture of CCA arises if the proceeds take the class's undepreciated capital cost below zero, and it is reported on Form T776 (line 9947). If the property sells for more than its cost, you may have both a capital gain and recapture. If a balance is left in the class after the last property is sold, you can usually deduct a terminal loss from rental income, and you cannot have a capital loss on depreciable property.
Foreign tax credit and the principal residence question
If you paid US tax on income you reported in Canada, you can claim a federal foreign tax credit on line 40500 using Form T2209, and Form T2036 for the provincial credit. The federal credit is generally the lesser of the foreign income tax actually paid and the Canadian tax otherwise payable on your net income from that country. Canada also gives a deduction from Canadian tax for U.S. income tax paid on U.S.-source income.
Some owners ask whether the principal residence exemption can shelter the gain. A family can designate only one home as its principal residence for each year for 1982 and later years. Where a property was not your principal residence for every year you owned it, only part of the gain is exempt, using gain × (designated years + 1) ÷ years owned. Whether a particular US property qualifies depends on the facts and is worth confirming with a Canadian tax professional.
If you still hold other specified foreign property, review Form T1135 for the year of sale, since the filing depends on cost above $100,000 at any time in the year.
What to do next
- Tell your US real estate agent or closing agent that you are an Ontario resident and ask what will be held back.
- Contact a US tax adviser before closing to ask about reducing the amount held.
- Gather the purchase price, closing costs, renovation receipts and exchange rates for each date.
- Collect your T776 records and CCA schedules if the property was rented.
- Keep every US closing document and any US tax filings, since the Canadian foreign tax credit depends on your residence, the tax you actually paid and the lesser-of limit.
A Canadian lawyer or accountant can help you line up the Canadian reporting with whatever the US side requires.
Frequently asked questions
Can the US tax a gain on a US property I sell as an Ontario resident?
Yes, the Canada-U.S. Tax Convention provides that gains from selling real property in the U.S. may be taxed in the U.S.. Canadian residents must also report all income earned from foreign property, and Canada gives a deduction from Canadian tax for U.S. income tax paid on U.S.-source income.
How much will the buyer hold back?
That is set by US law and is not something this article can state. Ask your US adviser or the closing agent as early as possible, before the closing date.
Do I report the sale in Canada?
Yes. Capital gains and losses are reported on Schedule 3, and the taxable capital gain goes on line 12700.
Which exchange rates do I use?
Proceeds are converted at the rate at the time of sale, the cost base at the rate on the purchase date, and expenses at the rate when they were incurred.
Sources
- CRA – Principal residence — canada.ca
- CRA Income Tax Folio S1-F3-C2 (¶2.20) — canada.ca
- CRA Guide T4037, Capital Gains — canada.ca
- CRA Guide T4036, Rental Income — canada.ca
- CRA – Foreign Income Verification Statement (T1135) — canada.ca
- CRA – Questions and answers about Form T1135 — canada.ca
- CRA – Line 40500 Federal foreign tax credit — canada.ca
- Department of Finance – Canada–U.S. Tax Convention (consolidated) — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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