Topic · Canada
Capital gains for Americans in Canada: half-inclusion, the principal-residence exemption, and the US return
Canada includes half of a gain and exempts a home entirely; the United States includes all of it, in dollars, shelters $250,000 of a home, and adds 3.8% above the threshold. How the two systems meet on a sale.
By Danilson Ramos · Founder, Atamatax
Published June 2026 · Updated September 2026
Part of the Canada desk — every US tax topic for Canada in one place.
Check it for your own income
Does the 3.8% reach your investment income?
Four banded answers, no figures typed, no email. The read says which side of the threshold you sit on and — if you paid tax abroad — what that credit can and cannot do.
Free, no account, nothing you answer leaves this page. Open the full NIIT Exposure Check
A banded screen for a US citizen or resident; Form 8960 settles the exact figure. Four answers give bands for net investment income and MAGI, and no read here nets a foreign tax credit against the 3.8% — the Code allows none.
Paul Bruyea sold Canadian real estate in 2015, paid Canada, and owed the United States 3.8% on the same gain. His estate's refund suit produced the trial-court win that made cross-border preparers hopeful, and the Federal Circuit reversal that ended it. A sale is where the systems meet most sharply for an American in Canada: Canada's answer turns on what was sold, the US answer barely does.
What Canada does
| Asset sold | Canadian treatment |
|---|---|
| Shares, funds, ETFs in a non-registered account | Half the gain included in income, taxed at the marginal rate |
| Anything inside a TFSA, RRSP, RESP, FHSA | No tax on the sale inside the account |
| A cottage or rental property | Half the gain included; recaptured depreciation fully included |
| Principal residence | Exempt, one property per family per year |
| Crypto-assets | Half the gain included, or business income if trading |
What the United States does
Every sale by a US citizen is a disposition on Form 8949 and Schedule D, in dollars: cost at the acquisition-date rate, proceeds at the sale-date rate, so that the loonie's movement is part of the gain. Long-term gains at 0%, 15% or 20% by bracket; short-term at ordinary rates; the whole gain, not half. The TFSA's shelter does not exist for US purposes — a sale inside it is a sale. The RRSP's does, under Article XVIII(7). A home gets §121 — $250,000, $500,000 joint — and the rest is taxable gain; depreciation claimed on a rental is recaptured.
A Canadian mutual fund or TSX-listed ETF outside an RRSP is the exception: as a PFIC, its sale is a §1291 excess distribution allocated across the holding period at the top rate with an interest charge, or a mark-to-market inclusion if elected. Canadian funds and the PFIC rules goes through it.
Where the two meet: the credit
Canadian tax on the gain credits against the regular US tax on the same gain on Form 1116, within §904. For Canadian real property, Article XIII lets Canada tax first and Article XXIV's re-sourcing rules keep the credit from being blocked by the source limit. In the usual case the credit cancels the regular US tax on the gain, because Canadian rates on the included half generally exceed the US rate on the whole.
For a principal residence there is no Canadian tax and no credit: the US tax on the gain above §121 lands in full.
And then the 3.8%
The gain is net investment income under §1411(c)(1)(A)(iii). If MAGI — with the foreign earned income exclusion added back — exceeds $200,000 (single) or $250,000 (joint), the 3.8% applies to the smaller of the year's net investment income and the excess. No Canadian tax counts against it. That is the Bruyea holding, precedential: Article XXIV's credit is subject to the Code's limitation, and the Code gives no credit against chapter 2A tax.
What to check before selling
- The US basis in dollars at the acquisition-date rate — the loonie's history is part of the gain.
- Whether the asset is a PFIC, which replaces the capital-gain computation.
- Whether Canada will tax the gain (non-registered, cottage, rental) or exempt it (principal residence, inside a registered account) — which decides whether there is anything to credit.
- MAGI for the year of sale against the threshold; a sale can be timed across years.
- For a home: §121 eligibility (two of the last five years), depreciation recapture if it was ever rented, and §988 on the mortgage.
Will the 3.8% reach your sale?
Four banded answers and a read on the threshold, with the Canada decision named on the credit line.
Authorities cited
- IRC §1411 — IRC §1411 — Net Investment Income Tax (3.8%)
- IRC §121 — IRC §121 — Exclusion of gain from sale of principal residence ($250,000 / $500,000)
- IRC §988 — IRC §988 — Treatment of certain foreign currency transactions (a repaid foreign-currency mortgage can produce ordinary gain)
- IRC §901 — IRC §901 — Taxes of foreign countries and U.S. possessions
- IRC §904 — IRC §904 — Limitation on the foreign tax credit
- IRS Form 1116 — About Form 1116 — Foreign Tax Credit (Individual, Estate, or Trust)
- IRS Form 8960 — About Form 8960 — Net Investment Income Tax (Individuals, Estates, and Trusts)
- US–Canada Income Tax Treaty — Convention between the United States and Canada (signed 1980), as amended by its five Protocols
- Estate of Bruyea v. United States (Fed. Cir. 2026) — Estate of Paul Bruyea v. United States, No. 25-1563 (Fed. Cir. Aug. 31, 2026) (precedential) — the U.S.–Canada treaty's Article XXIV(1) and XXIV(4)(b) credits are subject to the U.S. Law Limitation; the Code and Convention unambiguously preclude offsetting the NIIT by a foreign tax credit; reversing 174 Fed. Cl. 238 (2024)
- IRC §1291 — IRC §1291 — Interest on tax deferral (excess-distribution regime)
- IRS Form 8621 — About Form 8621 — Information Return by a Shareholder of a PFIC or QEF
- IRS · yearly average exchange rates — IRS — Yearly average currency exchange rates
- Rev. Proc. 2014-55 — Rev. Proc. 2014-55 — automatic tax deferral for Canadian RRSPs and RRIFs; eliminates the Form 8891 election
Primary sources (Cornell Legal Information Institute for the US Code and CFR; IRS.gov for forms, procedures, and treaty documents). This page is general information, not individualized tax or legal advice.
Atamatax provides tax preparation support and educational resources. This website does not constitute legal or tax advice.