Canada-US Treaty Article XIII: Real Estate Capital Gains

Section 01Article XIII(1): why the United States taxes a Canadian seller first

Most Canadian readers expect a tax treaty to mean that one country gives up taxing rights so the other can tax. Article XIII(1) does the opposite for real property. It confirms that gains derived by a resident of one Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other State. In plain language, the country where the dirt sits is allowed to tax the gain, regardless of where the seller lives.

This is consistent with what the IRS Technical Explanation of the treaty states: "alienation" includes sales, exchanges, and deemed dispositions, and the source country (the United States, in this case) keeps the right to tax. There is no reduced rate, no exemption, and no special treaty rate that overrides FIRPTA or normal US capital gains rates. The treaty does not lower US tax on the sale of Florida real estate; it confirms that US tax applies.

The practical consequence is that a Canadian seller of a Florida property goes through the full US tax process: FIRPTA withholding by the buyer at closing, filing of Form 1040-NR for the year of sale, computation of the gain on Schedule D, and reconciliation of the FIRPTA withholding against actual US tax owed. The dedicated CanadaFlorida guides on FIRPTA withholding, US capital gains rates for non-residents, and Schedule D and Form 1040-NR cover those mechanics step by step. This guide focuses on the treaty layer that sits above them.

Section 02Article XIII(4): the residual rule, and why it does not help a Canadian selling Florida

Article XIII(4) states that gains from the alienation of any property other than that referred to in paragraphs 1, 2, and 3 are taxable only in the Contracting State of which the alienator is a resident. This is the rule that exempts, for example, a Canadian resident's gain on the sale of US-listed shares from US tax: the United States agrees not to tax it because of XIII(4).

For Florida real estate, paragraph (4) does not apply, because real property is captured by paragraph (1). The result is that XIII(4) gives a Canadian seller of US shares a meaningful protection, but gives a Canadian seller of a Florida condo no protection at all.

Section 03Article XXIV: the actual mechanism that prevents double taxation

Article XIII assigns taxing rights but does not, by itself, remove double taxation. The relief comes from Article XXIV (Elimination of Double Taxation). Article XXIV(2)(a) requires Canada, subject to its domestic law, to allow as a deduction from Canadian tax the appropriate amount of US tax paid by a Canadian resident on income that may be taxed in the United States under the treaty, including gains taxable under Article XIII(1).

In practice, this is implemented in Canada through section 126 of the Income Tax Act, which is the foreign tax credit provision, and on the Canadian return through Form T2209 (federal foreign tax credit) and Form T2036 (provincial or territorial foreign tax credit, except for Quebec, which has its own form TP-772-V). The credit is limited: a Canadian resident may claim a credit equal to the lesser of the US tax actually paid on the Florida gain, or the Canadian tax otherwise payable on that same gain (computed on Canadian principles, with the Canadian inclusion rate of 50% in 2026).

Two practical points follow. First, the FIRPTA 15% withheld at closing is not the seller's final US tax; it is a prepayment. The actual US tax liability is computed on Form 1040-NR, and any excess withholding is refunded by the IRS. Only the actual US tax paid (after the 1040-NR is processed, not the gross FIRPTA prepayment) qualifies as a foreign tax credit on the Canadian return.

Second, if the US tax exceeds the Canadian tax otherwise payable on the same gain (which can happen, for instance, when provincial rates are low), the excess US tax is not refundable in Canada and cannot be carried forward. It is a permanent Canadian credit limitation that follows from section 126(1).

Section 04Article XIII(3): the holding company rule

A common assumption among Canadian investors is that holding a Florida property through a corporation, partnership, or LLC moves the asset away from US taxation, because what is being sold is shares or interests rather than real estate. Article XIII(3), reinforced by FIRPTA's domestic equivalent (section 897 of the Internal Revenue Code) and by Canada's TCP regime in the ITA, closes this door.

Article XIII(3), as amended by the 2007 Protocol, defines the term "real property situated in the other Contracting State" to include, in the case of the United States, a United States real property interest within the meaning of section 897 of the Internal Revenue Code. The effect is that the sale by a Canadian resident of shares of a corporation whose value is principally derived from real property situated in the United States is treated, for treaty purposes, as a disposition of real property situated in the United States. The United States may tax the gain just as if the seller had sold the building directly.

In symmetrical fashion, Article XIII(3)(b)(ii) provides that gains realized by a US resident on shares of a Canadian company whose value is principally derived from real property situated in Canada may be taxed in Canada. This mirrors Canada's TCP rules in the ITA, which capture non-residents disposing of taxable Canadian property and trigger the section 116 clearance certificate process for that direction of travel.

For a Canadian who owns Florida real estate through an LLC, a Florida limited partnership, or a US corporation, Article XIII(3) means that the treaty offers no escape from US capital gains tax on the underlying property when the entity is wound down or its interests are sold. The CanadaFlorida guide Selling via LLC in Florida: Canadian Owners covers the entity-specific filing mechanics.

Section 05Article XIII(7): the timing-alignment election

Article XIII(7) addresses a different problem: timing mismatches between Canadian and US tax events on the same property. The classic case is a Canadian resident who emigrates to the United States. On emigration, Canada applies a deemed disposition under paragraph 128.1(4)(b) of the ITA (the "departure tax"), which triggers Canadian tax on the unrealized gain in the year of departure. The United States, however, only taxes the gain when there is an actual sale. Without coordination, the same gain would be taxed in Canada in year 1 (departure) and in the United States in year 5 (actual sale), with no foreign tax credit available, because the two years do not match.

Article XIII(7) lets the taxpayer elect to be treated, for purposes of the other Contracting State, as having sold and repurchased the property at fair market value at the time of the deemed disposition. The mechanics for an emigrating Canadian taxpayer are set out in IRS Revenue Procedure 2010-19, which requires the election to be reported on a timely-filed US return for the first taxable year ending after emigration, with Form 8833 (Treaty-Based Return Position Disclosure) attached.

For a Canadian resident who simply sells a Florida property in a single tax year, paragraph (7) is not engaged. It becomes relevant in a narrower set of cases, primarily Canadians moving to the United States who hold Florida real estate at the time of departure, and Canadian-resident trusts subject to the 21-year deemed disposition rule under paragraph 104(4)(b) of the ITA.

Section 06Comparison: how Article XIII plays out on each side

The table compares the treaty's effect on a Canadian-resident individual selling a Florida property, using Quebec as the reference province on the Canadian side. Equivalent comparisons for Ontario, British Columbia, and other provinces are forthcoming in this guide.

Section 07Worked example: Canadian seller, Florida condo

The following walks through a representative case using verified rates and the standard treaty mechanism. All figures are illustrative; they are a Typical range example, not a quoted source.

A few details matter. The FX conversion is performed at the Bank of Canada exchange rate prevailing on the date of each transaction (acquisition, sale, and US tax payment), not at one consistent rate. The Canadian-side gain and the US-side gain may differ in magnitude because of FX movement between the acquisition date and the sale date. The Canadian foreign tax credit is calculated country-by-country and is limited to the Canadian tax that would have been payable on the foreign-source gain.

Section 08Common mistakes Canadian sellers make

The following errors recur in cross-border real estate sales and lead to overpaid US tax, lost Canadian credits, or compliance failures.

1. Treating the FIRPTA 15% as the final US tax. It is a withholding deposit, not a tax. The seller still has to file Form 1040-NR to compute actual US tax on the net gain. Without that filing, the IRS keeps the FIRPTA prepayment and the Canadian foreign tax credit calculation is wrong.
2. Claiming the FIRPTA withholding (rather than actual US tax) as the foreign tax credit on the Canadian return. The FTC under section 126 is based on US tax paid, not on amounts withheld in advance. Until Form 1040-NR is filed and the excess refunded, the actual US tax paid is not yet known.
3. Reporting the Canadian gain in the wrong tax year. The Canadian gain is recognized in the year the property is sold under Canadian law, regardless of when the IRS processes the 1040-NR or refunds the FIRPTA excess. The credit may have to be claimed in a later year if the US tax is finalized after the Canadian return is filed, by amending the Canadian return.
4. Assuming a Canadian-owned LLC or corporation avoids US tax. Article XIII(3) and section 897 of the Internal Revenue Code apply to dispositions of interests in entities whose value is principally derived from US real property. Selling the LLC's only asset, dissolving it, or selling LLC interests does not escape US capital gains tax.
5. Forgetting that Canada taxes the worldwide gain even with a US loss. A Canadian resident sells a Florida condo at a US tax loss in a given year. The seller may have no US tax to claim as FTC, but Canada still has to be told the property was sold; the Canadian capital loss is reported on Schedule 3 and may offset other Canadian capital gains.
6. Confusing Article XIII(7) with the standard sale path. Article XIII(7) is for timing-mismatch cases, primarily emigration and trust deemed dispositions. It is not the article a snowbird selling a Florida condo invokes; for a straight sale, Article XIII(1) and Article XXIV(2) are the relevant paragraphs.
7. Ignoring the principal residence exemption analysis on the Canadian side. A Canadian resident may, in some narrow cases, designate a Florida property as their principal residence for some or all of the years of ownership, which can reduce or eliminate the Canadian capital gains tax (though it does not affect the US side). The dedicated guide Canadian Principal Residence Exemption vs. Florida Property walks through eligibility and trade-offs.

Section 09Actionable checklist

The following sequence is what a Canadian seller (or their advisor) typically works through, in order, when Article XIII applies.

1. Confirm that the property is "real property" within the meaning of Article XIII(1) and section 897 IRC. Direct ownership of land, condo, single-family home: yes. Shares of a holding entity whose value is principally US real property: also yes, under XIII(3).
2. Obtain or verify the seller's US Individual Taxpayer Identification Number (ITIN). Without an ITIN, the FIRPTA refund process cannot be completed and the US filing is blocked.
3. Determine whether any FIRPTA exception applies. The buyer-residence exemption at USD 300,000 or less, the reduced 10% rate at USD 1,000,000 or less, or a Form 8288-B withholding certificate request can reduce or eliminate the prepayment. See the dedicated guides on the USD 300,000 FIRPTA exception and Form 8288-B.
4. At closing, ensure that the FIRPTA paperwork is completed correctly: Form 8288 and Form 8288-A filed by the buyer or settlement agent within 20 days, with the seller receiving the stamped Form 8288-A.
5. After closing, file Form 1040-NR with Schedule D and Form 8949 for the year of sale, computing actual US tax on the net gain and claiming the FIRPTA withholding as a credit against that tax.
6. On the Canadian return for the same calendar year of disposition, report the gain on Schedule 3 (line 12700) at the 50% inclusion rate, and prepare Form T2209 (federal FTC) plus Form T2036 (provincial FTC, except Quebec) or Quebec form TP-772-V.
7. Convert all USD figures to CAD at the Bank of Canada exchange rate prevailing on the date of each transaction.
8. Retain records: closing statement (HUD-1 / Closing Disclosure), Form 8288-A, Form 1040-NR, IRS refund or assessment notice, USD-CAD conversion sheet, and original purchase documents establishing adjusted cost base, for at least six years.
9. If the Canadian return is filed before the IRS finalizes the US tax (which is common, given IRS processing times for non-residents), be prepared to amend the Canadian return once the actual US tax is known, to align the FTC.
10. Consult a cross-border tax professional before signing the listing agreement, not after closing. The US filing path, the Canadian provincial impact, and the FX timing are all set in motion at closing.

Section 10FAQ

Does the treaty reduce the FIRPTA withholding rate from 15%? No. Article XIII does not change the FIRPTA rate. The 15% rate (or 10% in the buyer-residence reduced case, or 0% under USD 300,000 if the buyer resides in the property) is set by the Internal Revenue Code, and the treaty does not override it. The treaty operates after the US tax has been determined, by allowing Canada to credit the actual US tax paid.

Does Florida add a state-level capital gains tax I need to credit on the Canadian side? No. Florida has no state income tax on capital gains, so there is no Florida state tax to add to the federal computation and no Florida state tax to credit on the Canadian side. The full US-side tax is the federal tax computed on Form 1040-NR.

I sold at a loss. Does the treaty help me? Article XIII does not create a refund or relief on losses; it allocates taxing rights. On a US loss, the seller files Form 1040-NR to recover the FIRPTA withholding (since there is no actual US tax to apply it against), and reports the Canadian capital loss on Schedule 3, which can offset other Canadian capital gains. The dedicated guide Loss Sale and FIRPTA Withholding Recovery walks through this case.

I sold the LLC, not the property itself. Does Article XIII still apply? Yes, through Article XIII(3) and section 897 IRC. If the LLC's value is principally derived from Florida real property, the gain on the disposition of LLC interests is treated as a gain on US real property for treaty purposes, and the United States may tax it.

Can I use the Canadian principal residence exemption on my Florida condo? In some narrow cases, yes, on the Canadian side only. The Canadian principal residence exemption is technically available for foreign property, but practical eligibility depends on the family unit's residence pattern, ordinarily-inhabited test, and the family's other Canadian property designations. The exemption does not affect US tax in any way. See Canadian Principal Residence Exemption vs. Florida Property.

Does the Net Investment Income Tax of 3.8% apply to me? No. The NIIT applies to US persons (citizens and US-resident aliens for tax purposes). A Canadian resident filing Form 1040-NR is a nonresident alien for US tax purposes and is not subject to the 3.8% NIIT on the Florida sale.

Do I need to do anything different if the property was rental property rather than personal use? The Article XIII analysis is the same: the United States taxes the gain on the disposition of the real property. However, depreciation recapture rules in section 1(h) IRC and the NIIT-equivalent state-level regimes (none in Florida) can change the US-side computation. A property that has been rented and depreciated will generate "unrecaptured section 1250 gain", which is taxed at up to 25% federally on the recapture portion. The Canadian side then applies normal capital gains rules to the full gain.

Why does my Canadian gain not match my US gain on the conversion? Because the FX rate moves between the date of acquisition and the date of sale. The Canadian gain is computed in CAD at the historical Bank of Canada rate on each transaction date. The US gain is computed in USD only. The two figures are not expected to match after conversion, and the foreign tax credit calculation is performed independently on each side, with the Canadian-side limitation governed by section 126(1) ITA.