Overview
These CRA rulings discuss how the Foreign Tax Credit (FTC) works when a Canadian resident sells U.S. rental property and pays U.S. tax on the capital gain. The issues addressed include:
-
Whether foreign taxes paid on U.S. capital gains qualify as non-business income tax under s.126(7)
-
Whether unused foreign tax can be:
-
deducted under s.20(12), or
-
treated as an outlay under 40(1)(a)(i)
-
-
Whether FTC uses taxable capital gains, not gross gains
-
Whether Canada taxes the capital gain as worldwide income
-
Whether Form T1135 is required
1. Canada Taxes Capital Gains on Foreign Real Property
CRA confirms:
Canadian residents are taxed on capital gains from any real property, including U.S. real estate.
This includes a U.S. rental property that is capital property to the taxpayer.
Gain is calculated using Canadian rules:
-
Proceeds converted to CAD
-
ACB based on FMV at immigration date (if applicable)
-
Only taxable capital gain (50%) included in income
Foreign taxes paid to the U.S. may qualify for FTC under s.126(1)
…but only up to Canadian tax payable on that same source.
Documentation requirements
CRA requires evidence of U.S. tax paid when claiming the FTC.
2. Amount of U.S. Tax Eligible for FTC
For a non-U.S. citizen resident in Canada, CRA states:
The U.S. tax paid shown on Form 1040NR (after U.S. tax credits, before U.S. FTC)
is generally the amount treated as non-business income tax under s.126(7).
Because the U.S. has taxing rights over U.S. real property (Article XIII),
Canada must provide an FTC under s.126(1) and Article XXIV.
The FTC is calculated on Form T2209
and cannot exceed Canadian tax on that same capital gain.
3. FTC Uses Taxable Capital Gains, Not Full Capital Gains
CRA clarifies the formula on Form T2209:
“Net foreign non-business income” includes
the taxable capital gain under Canadian rules — not the gross capital gain.
Why this matters:
-
The numerator (foreign income) uses taxable capital gains
-
The denominator (net income) also includes taxable capital gains
Therefore, the ratio remains consistent (1:1), even when inclusion rate is 50%.
If the U.S. gain is treaty-exempt
(no U.S. tax imposed under Canada–U.S. treaty),
then:
It is not included in foreign non-business income
No FTC is available
4. Rental Income, Conversion to Income Property & T1135
(Based on 2008-0294491E5)
Rental income from U.S. property is taxable in Canada
FTC may apply for U.S. tax paid on rentals.
Personal-use property converted to rental
may trigger a deemed disposition at FMV.
T1135 Foreign Property Reporting
Required if total cost of foreign property exceeds $100,000 CAD.
5. Key Takeaways
- Canada always taxes the capital gain on U.S. rental property (worldwide income)
- U.S. tax on the gain usually qualifies for FTC (non-business income tax)
- FTC is based on taxable capital gains
-
Unused foreign tax:
- Not deductible under s.20(12)
- Not a disposition expense under 40(1)(a)(i)
- Not carry-forward or carry-back - Foreign tax credit cannot exceed Canadian tax payable on that gain
- T1135 may apply
Disclaimer
This page summarizes CRA technical interpretations 2003-0003095, 2003-0013335, 2008-0294491E5, and 2010-0355551E5, which may not represent current CRA policy. This information is for general guidance only and not tax or legal advice.
