What every American should know before buying a home in Canada

A case study: When the principal residence exemption isn’t enough

Take London and Ava. London grew up in St. Louis before accepting a management position with a Canadian technology company in Vancouver. There, he met Ava, a Canadian elementary school teacher. After getting married, they purchased what they hoped would be their forever home—a detached house in Toronto for $850,000 CAD.

Over the next 20 years, they renovated the kitchen, finished the basement, watched their two children grow up, and built a life around their neighbourhood. By the time they retired, the house was worth $2 million. Selling the home felt like the final chapter of a successful life in Canada.

Their Canadian neighbours congratulated them on a completely tax-free sale because Canada’s principal residence exemption sheltered the entire gain. Then, London received a call from his cross-border tax adviser.

“As a U.S. citizen,” the adviser explained, “the IRS still wants to know about the sale.”

Depending on the home’s appreciation and how the property had been owned from the beginning, London could owe U.S. tax on a gain that Canada wouldn’t tax at all. It’s one of the most common and overlooked cross-border tax issues facing Americans who build their lives in Canada.

Canada says tax-free, the IRS doesn’t always agree

Canada’s principal residence exemption is among the most generous tax breaks available to homeowners. In most cases, Canadians can sell their principal residence without paying capital gains tax, regardless of how much the property has appreciated.

The United States operates under an entirely different system. Unlike almost every other country, the U.S. taxes its citizens regardless of where they live. Living in Canada doesn’t end your U.S. tax obligations, and that includes the sale of your Canadian home.

Current U.S. rules allow individuals to exclude up to $250,000 USD of gain from the sale of a principal residence, while married couples filing jointly may qualify for a $500,000 USD exclusion if both spouses satisfy the ownership and residency requirements.

Article Continues Below Advertisement

Skip Ad

X

That sounds generous until you consider the appreciation many Canadian homeowners have experienced over the past two decades. In cities such as Toronto and Vancouver, gains well beyond those thresholds are no longer unusual.

For Americans living in Canada, a home they assumed would be completely tax-free can become one of the largest taxable assets they own.

The way you register your home matters

One of the biggest planning opportunities often occurs before the purchase agreement is even signed.

Like most newly married couples, London and Ava purchased their home jointly without giving much thought to how the title was registered. From a Canadian perspective, there was nothing unusual about that decision. From a cross-border tax perspective, however, a different ownership structure may have produced a better outcome.

For mixed-nationality couples where one spouse is a U.S. citizen and the other is not, holding the property as tenants in common with a larger ownership interest allocated to the non-U.S. spouse may substantially reduce future U.S. capital gains exposure.

Every family’s circumstances are different, and the appropriate ownership structure depends on a variety of tax, legal, and estate planning considerations. That’s why these decisions should be evaluated before buying a home, not years later when changing title can trigger legal, tax, or land transfer consequences.

Of course, taxes are only part of the equation. Ownership decisions also affect probate, estate administration, creditor protection, and provincial family law rights. The best solution balances all of these considerations rather than focusing on taxes alone.

Buying isn’t always the hard part

Before worrying about taxes, Americans should first determine whether they’re allowed to purchase residential property at all.

Since 2023, Canada’s Prohibition on the Purchase of Residential Property by Non-Canadians Act has restricted many foreign buyers from purchasing residential property in certain parts of the country. Although permanent residents and many temporary residents qualify for exemptions, eligibility depends on immigration status and the type of property being purchased.

For Americans living in Canada who are planning to buy a home, it’s worth confirming eligibility before making an offer rather than after negotiating a purchase agreement.

Don’t forget estate planning

A home is often a family’s largest asset, making ownership decisions important for more than just income taxes. London and Ava also discovered that how they owned the home would eventually affect their estate planning.

U.S. citizens and green card holders remain subject to the U.S. estate tax regime on their worldwide assets, even while living in Canada. While relatively few families ultimately pay U.S. federal estate tax because of the current exemption amounts, ownership structure still influences probate, estate administration, succession planning, and how efficiently assets pass to the next generation.

For many families, the best time to address those issues is before closing, not years later when changing ownership can become far more complicated.

The bottom line

London and Ava’s story isn’t unusual. Every year, Americans move to Canada, build careers, raise families, and assume their home will receive the same tax treatment as everyone else’s. Many don’t discover otherwise until they’re preparing to sell decades later.

The irony is that most cross-border tax problems aren’t caused by buying the wrong house, but by making ownership decisions before understanding how two very different tax systems interact.

Read more about U.S.-Canada finances:

• Moving to the U.S.? Don’t rush to convert your Canadian investments
• Your locked-in RRSP may not be as locked in as you think
• What happens to an RESP when a family moves to the U.S.?

About Carson Hamill, BBA, CIM, CRPC, FCSI

Carson is licensed in both Canada and the U.S. He specializes in cross-border wealth management, helping clients navigate financial planning and investments in both countries.

Linkedin Twitter Website