A Guide for Canadians Selling U.S. Real Property

A Canadian individual, corporation, partnership or trust, selling real estate property in the United States must follow the Foreign Investment in Real Property Tax Act (“FIRPTA”). FIRPTA is a U.S. federal law requiring buyers to withhold 15% (or 10% in specific cases) of the gross sales price when purchasing a U.S. real property from a foreign seller.

Below is a comprehensive explanation of the process, including the steps required to obtain an ITIN and comply with FIRPTA withholding and reporting requirements.

1) Select an Escrow Agent or a Title Company

Choose a U.S. escrow agent or a title company experienced with FIRPTA transactions (referred to as the “Withholding Agent”).
Confirm they will act as the Withholding Agent and coordinate all the FIRPTA paperwork with the buyer.
Align timelines for document collection and the sale closing date.
The Withholding Agent will likely require a purchase agreement to process the conveyancing of the real property. If a local real estate professional is not already involved, you may need to engage one.

2) Required FIRPTA Documents (The Withholding Agent to Prepare Before Closing)

Form 8288 – U.S. Withholding Tax Return (buyer/title company submits to the IRS).
Form 8288-A – Statement of Withholding for the foreign seller (buyer/title company submits; the IRS returns a stamped copy to the seller).
Form 8288-B – Application for Withholding Certificate (optional; seller applies to reduce/eliminate withholding, can be costly), not recommended as it takes a long time.
Buyer’s principal-residence affidavit (if applicable) to support reduced/zero withholding.

3) Remittance and Filings

Buyer or the Withholding Agent deducts the FIRPTA amount (15% of the gross sales price) at closing.
Within 20 days of the date of the sale, the buyer or the Withholding Agent remits withholding to the IRS with required forms (Form 8288 and 8288-A) by the statutory deadline
The Withholding Agent retains the settlement statement (HUD/Closing Disclosure) and copies of all FIRPTA submissions.
If the seller does not have an ITIN at the time of closing, the buyer/Withholding Agent can submit the forms and payment to the IRS without the seller’s ITIN.
The IRS will not issue a stamped Copy B of Form 8288-A to the seller until the seller obtains an ITIN and provides it to the IRS.
Once the ITIN is issued, the seller should notify the IRS (as instructed in the IRS letter sent after the initial submission) so that the IRS can update its records and issue the stamped Copy B of Form 8288-A.
The seller will need the stamped Copy B of Form 8288-A to claim credit for the FIRPTA withholding on their U.S. tax return (Form 1040-NR).

4) Obtain an identification number from the IRS (ITIN for foreign individuals or EIN for other entities)

An identification number is required to file a U.S. tax return and to receive any refund of excess FIRPTA withholding.
For Individuals:
- Complete Form W-7, check box “h” (Other) and write “Exception 4” (Third- Party Withholding – Disposition by a Foreign Person of a U.S. Real Property Interest) in the space provided
- Attach the following:
  - Proof of identity and foreign status (e.g., original or certified copy of a passport. (To avoid mailing original passports, certification of the copy must be completed by an IRS Acceptance Agent or at designated IRS locations. We have a Canadian-based IRS Acceptance Agent who we can connect you to.)
  - A completed copy of Form 8288, Form 8288-A, or Form 8288-B (if applying for a withholding certificate) (see below).
  - A copy of the real estate sales contract, Settlement Statement (HUD-1), or Closing Disclosure.
  - If applicable, documents evidencing a notice of nonrecognition (e.g., for a like-kind exchange)
- Mail the Form W-7 package and attachments noted above to:

Internal Revenue Service
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342

For entities: This process is more complex than the process for individuals. Please contact us so that we can assist you with this process.
The IRS generally processes ITIN applications within 7 weeks (longer if submitted during peak tax season or from abroad).

5) U.S. Tax Filings

Seller to report the disposition of the property, and the resulting gain/loss, on a US tax return for the taxation year that includes the sale date.
Consider if any state return(s) need to be filed.
Attach the IRS-stamped Form 8288-A, copy B, to claim credit for the tax withheld.
If the withholding exceeds the tax computed on the US tax return, the refund can be claimed.

6) Canadian Tax Filings

Seller to report the disposition of the U.S. real property, and the resulting gain/loss, on the Canadian tax return for the taxation year that includes the sale date
Claim the Foreign Tax Credit for the U.S. federal and applicable state taxes to avoid double taxation on the disposition.
Maintain documentation of exchange rates used for ACB, proceeds, and expenses.

7) Best Practices

The seller should start the ITIN process early to prevent refund delays.
Coordinate with the title company on exact mailing addresses and deadlines for FIRPTA forms.
The seller can only claim foreign tax credits on its Canadian income tax returns, if Form 1040-NR for individuals or Form 1120-F for foreign entities has been filed.
The seller must obtain a tax account transcript from the IRS to be able to claim the foreign tax credit and provide it to CRA if requested.
If the US real property is transferred outside of the process of a formal sale with a withholding agent, there may be filing and withholding obligations.

Our Manning Elliott cross-border tax professionals can guide you through the process of selling real property in the United States. Contact us if you have questions about the process detailed above or would like more information about our services.