The sale of a principal residence could lead to major tax bills for Americans in Canada. This is especially true for those that have held their homes for long periods or those that live in high house value markets.
For U.S. purposes, the first $250,000 of a gain may be exempt. This may be increased to $500,000 depending on the residency/citizenship status of the spouse. Gains above these thresholds may be subject to tax at, for example, 20%.
Even if there is no change in value of the property in Canadian dollars, gains in U.S. dollars may occur as a result of the appreciation of the Canadian dollar. For U.S. tax purposes, the cost and selling price must be measured in U.S. dollars at the point when the transactions occurred. For example, if a home cost $1,000,000 CDN when $1.00 CDN was worth $0.65 U.S., the cost would be $650,000 U.S. If it were sold for the same CDN dollar amount 10 years later when the exchange rate was par, the proceeds (selling price) would be $1,000,000 U.S., leaving the taxpayer with a $350,000 U.S. gain for tax purposes.
In Canada, gains on a principal residence, if all criteria are met, do not create a tax liability. Therefore, there is no Canadian tax paid with which to reduce U.S. tax liabilities via a foreign tax credit.
As reported in a January 22, 2015 Telegraph article, New York born Mayor of London, England, Boris Johnson, was caught by this rule and was required to pay an estimated £100,000 tax debt ahead of an upcoming business development trip to the U.S. Mr. Johnson has since stated that he intends to renounce his American citizenship.
Action Item: There can be significant tax issues for Americans in Canada. Ensure to inform us if you are an American, or potentially could be an American (e.g. you or your parents were born in the U.S.).