U.S. Citizens Resident in Canada – Capital Gains Tax Rate

Canadian Tax Planning, Capital Gains, Tax Residency

January 6, 2025

Steven Flynn - US Citizens Resident in Canada

What should be a straightforward answer gets complicated by recent events in Canadian Parliament and a recent US Tax Court Case.

Current Law

A U.S. citizen resident in Canada is subject to both U.S. federal income tax and Canadian on their worldwide income. In 2023, Canadian tax law stated that the maximum capital gains tax rate was 24% (Alberta residents) or 26.75% (British Columbia). Other provinces have similar rates.

Canadian Tax Changes Passed

In 2024, Canada passed changes to its Alternative Minimum Tax (“AMT”) legislation including changing the inclusion rate of capital gains from 50% to 100%. As a result, absent other taxable income, the top marginal Canadian tax on capital gains now ranges from approximately 30% (Alberta) to 32.1% (British Columbia). Canadian AMT is refundable over the next seven years where an individual’s regular income tax liability exceeds their AMT liability.

Canadian Tax Changes Not Yet Passed

In April 2024, Canada announced an increase to the inclusion rate for capital gains from 50% to 66.66%. This change proposed to increase the top marginal tax rate for capital gains to 32% (Alberta) or 35.67% (British Columbia). The effective date of this change was to be June 25, 2024. For individual taxpayers, the first C$250,000 of capital gains realized in the year would still have a 50% inclusion rate resulting in a capital gains tax rate of 24% (Alberta) or 26.75% (British Columbia). The amount of capital gains exceeding C$250,000 would be subject to the higher tax rate.

These capital gains rate changes are not law and as of the January 2025 writing of this blog, there is no capital gains tax legislation currently in front of Parliament. A fall of the Liberal minority government this winter should result in a spring election and a change in government. Where the front-running Conservative party was elected with a majority government, the changes in capital gains tax rates may never be passed into law. While Canada Revenue Agency has confirmed it plans to assess tax returns assuming the capital gains tax rate increases were passed into law, their position may change over time.

U.S. Tax – Court Case

U.S. citizens that own capital assets one year or longer are subject to U.S. federal income tax on capital gains realized at a maximum rate of 20%. With a Republican president and control of the House and Senate, it is unlikely the capital gains tax rate will increase in the near term. U.S. citizens resident in Canada can claim foreign tax credits in both the U.S. and Canada, ensuring that a capital gain is not subject to double taxation. Generally speaking, the top combined U.S. and Canadian tax rate for a U.S. citizen resident in Canada should be the higher of the Canadian tax rate and the U.S. tax rate.

While the U.S. allows foreign tax credits against U.S. federal income tax, they do not allow a foreign tax credit against the Net Investment Income Tax. The NIIT is a 3.8% tax on investment income including capital gains. As a result, calculating the total combined capital gains tax rate needs to add the US NIIT rate of 3.8% to the higher of the Canadian tax and the U.S. tax rate.

However, in December 2024, a U.S. Tax Court Judge ruled in the Bruyea Case, effectively allowing a U.S. citizen resident in Canada a foreign tax credit against the U.S. NIIT liability for Canadian capital gains taxes. While a great win for taxpayers, this case is likely to be appealed by the U.S.

Next Steps

How does one calculate the top marginal tax rate on capital gains for a U.S. citizen resident in Canada? A suggestion (using British Columbia Tax Rates):

Start with the highest possible rate: 39.47% (Canadian tax of 35.67% + U.S. NIIT of 3.8%)

Consider the likelihood of Parliament passing the increase in capital gains tax rates. If you think unlikely AND you are not sure if you can recover the Canadian AMT over the next seven years, lower the rate to 35.9% (Canadian tax of 32.1% + U.S. NIIT of 3.8%)

If you think Parliament will not pass the capital gains tax rate AND you have other income and will not be subject to AMT or know you can recover the AMT, then the rate is 30.55%. (Canadian tax of 26.75% + U.S. NIIT of 3.8%)

If you not only think Parliament will not pass the capital gains tax rate, you know you won’t be subject to Canadian AMT AND you are confident the Bruyea case results will be upheld in favour of the taxpayer, the rate is 26.75% (Canadian tax rate)

If you want to discuss this further, or this complexity has you thinking you want to cease Canadian residency, please contact Andersen as we can help.

Andersen Canada Contact

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