Selling a U.S. Property – Should One File a Form 8288 for a Deduction in U.S. Taxes?

Canadians who want to sell their vacation properties in the U.S. are surprised to discover that the IRS requires 15% withholding on the gross proceeds they will receive on the sale, regardless of what the tax on the net gain will be. 

Often, local counsel and/or CPA firms will encourage the Canadian vendor to file a Form 8288 calculating the actual lower tax liability with the IRS. The IRS is supposed to act within 90 days of the application to approve the reduction of the withholding amount. In the meantime, post-closing, the lawyers for the vendor must hold back the 15% withholding in an escrow account pending IRS action. 

In the pre-COVID era, filing a Form 8288 was reasonably sound advice. However, since the COVID era, we have been recommending an alternative course of action for the following reasons: 

• Rather than 90 days, the IRS timeline for reviewing the Form 8288 has increased to 18+ months. With pending IRS budget cuts, the timeline isn’t likely to be shortened. 

• In general, the Canadian tax liability will be greater than the U.S. tax liability as the Canadian tax rate on capital gains is currently 26.5% while the U.S. rate is a maximum of 20%. The Canadian tax liability may also be disproportionately large in situations where the U.S. property was purchased at a higher foreign exchange rate than the current exchange rate of under 70 cents. The CRA will only allow a foreign tax credit for U.S. taxes paid based on the actual U.S. tax liability which appears on an IRS transcript. The amount of U.S. withholding is inconsequential to the CRA. 

• When filing a Form 8288, the applicant must provide receipts for any home improvements made which increase the basis of the property sold and decreases the gain. Often, vendors have difficulty locating said documentation. 

• A professional will charge a fee for assisting in the preparation of Form 8288 and related schedules. Filing the Form 8288 does not relieve the vendor of the requirement to file a U.S. return as the return transcript will be needed to claim foreign tax credits with CRA. 

Summary 

As daunting as the withholding of 15% on the gross proceeds on the sale of a U.S. home might be, it is the current recommended course of action. The vendor will see his or her refund faster by going this route and filing a timely return rather than being trapped in the IRS twilight zone, waiting more than 18 months for said funds. 

If you have any questions, kindly contact Stanley Abraham at sa@zeifmans.ca or 647-256-7551.