THE SOLUTION:
Common solutions include renouncing U.S. citizenship or dying as the owner of the Canadian principal
residence. Both solutions serve to eliminate U.S. capital gains tax. However, the former is not a feasible
option for some U.S. citizens due to personal circumstances and/or the U.S. tax cost of renouncing. And
the latter is impracticable for a family who wants to sell during their lifetime.
To sell a principal residence and avoid capital gains tax, it may be benecial for Andrew and Cathy to
structure ownership of the Canadian home in the name of the spouse who is not a U.S. citizen. Ideally,
this structure would be implemented upon purchasing the home. Since Andrew and Cathy already
purchased the property jointly, sole ownership could be transferred to Cathy prior to selling through a
lifetime gifting transaction to eliminate the U.S. capital gains tax that would otherwise be payable by
Andrew to the IRS.
It’s important to note that gifts from U.S. citizen spouses to non-U.S. citizen spouses do not qualify for
the unlimited marital deduction that allows tax-free transfers between spouses. Such gifts to a non-U.S.
citizen spouse do, however, qualify for a limited annual exclusion (US$164,000 for gifts in 2022). Any
gifting beyond that would have to be covered by the U.S. citizen using some of their lifetime U.S. gift
tax exemption, which is the amount that a U.S. citizen can give away during their lifetime (or pass at
death) without incurring U.S. gift tax or U.S. estate tax. The exemption amount is indexed for ination
every year (US$12.06M per individual for 2022). The Biden administration has discussed lowering this
amount to as low as US$3.5M; failing which, the exemption will automatically decrease to an estimated
US$6.2M as of January 1, 2026. Many practitioners advise their clients on the possibility of a “use it or
lose it” scenario with respect to lifetime gifting.
After proper planning and implementation of a lifetime gifting transaction, Cathy could sell her 100%
interest in the house to a third-party purchaser. Since Andrew no longer owns the house at the time of
the sale, there will be no U.S. capital gains tax to pay.
Careful attention must be given to ensure the lifetime gifting strategy is Canadian and U.S. tax
compliant and other potential tax issues are properly addressed. Examples of potential issues and
special considerations include:
• Whether or not the gift is made “incident to divorce” (in which case the gift may be US taxable);
• The quantum of the gift that must be reported to the IRS on a U.S. gift tax return by the donor
spouse, which may require evidence to support the percentage of interest in the property
attributed to the gifting spouse;
• Whether local land transfer tax is payable for the real estate transfer;
• Legal documents required to properly formalize the gift;
• Ensuring that a local real estate lawyer properly registers the transfer; and
• Any relevant family law issues that arise in connection with the lifetime gifting strategy.
The lifetime gifting strategy is a specically crafted, complex solution to limit or eliminate future U.S.
capital gains tax liability regarding the sale of a Canadian principal residence, and it’s fraught with traps
that need to be carefully navigated. Not all solutions are applicable for every individual and unique
circumstance, and other complex considerations may arise.
If you are a U.S. citizen living in Canada wishing to sell a principal residence and avoid
U.S. capital gains tax, contact Michael Cirone to explore all available options. Michael
is a Canada/U.S. cross-border tax, trust and estate planning lawyer at TaxChambers LLP,
a boutique tax law rm in Toronto.
155 University Avenue, Suite 300
Toronto, ON, Canada M5H 3B7
Phone: 647-748-9797
E-mail: michael.cirone@taxchambers.ca