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When it comes to selling a personal residence, taxpayers in both the United States and Canada benefit from considerable exemptions that can shield all or part of the gain from capital gains tax. However, individuals who have cross-border status—particularly U.S. citizens living in Canada—face unique and sometimes costly tax implications. Below is a comprehensive discussion of the rules in each country and an illustrative example based on a U.S. citizen couple selling their Canadian home for a gain of more than $500,000 (USD).

United States: Principal Residence Exclusion

For U.S. tax purposes, the Internal Revenue Service (IRS) offers taxpayers a principal residence exclusion on capital gains from the sale of their home. The rules are as follows:

• Ownership and Use: To qualify, the seller must have owned and lived in the home for at least two out of the five years preceding the sale.
• Exclusion Amount: Up to $250,000 of gain can be excluded for single filers, or $500,000 for married couples filing jointly.
• Portion Above Exclusion: Any gain above the exclusion amount is taxable as a capital gain and must be reported on the tax return, even if the home was located outside the U.S.
• Reporting Requirement: Even if you exclude the full gain, if you receive an IRS Form 1099-S (Proceeds from Real Estate Transactions) or cannot exclude the entire gain, you must report the sale.
• Multiple Sales: The exclusion is generally available once every two years and only for your principal (main) residence.

Tax Rates: The taxable portion is subject to long-term capital gains tax rates, which can reach up to 20%, plus a 3.8% net investment income tax (NIIT) for high earners.

Canada: Principal Residence Exemption (PRE)

Canada’s tax system is generous regarding the sale of a primary home:

• Principal Residence Exemption (PRE): Most Canadians selling a home that has been their principal residence for every year of ownership can exempt the entire capital gain from taxation.
• Eligibility: The taxpayer, their spouse, or dependents must have “ordinarily inhabited” the home during the year for which the exemption is claimed.
• Designation Requirement: Homeowners must designate the property as their principal residence on their tax return using CRA Schedule 3 and CRA Form T2091(IND).
• Sales After Jan 1, 2023: If you held the property for less than a year (365 days), the gain may be treated as business income (and subject to full taxation) unless an exemption applies (e.g., death, divorce, work relocation).
• Multiple Properties: Only one property can be designated per family unit per year.

In summary: for most Canadians, there is typically no capital gains tax on a qualifying principal residence.

Complications for U.S. Citizens in Canada

Double Tax Liability: U.S. citizens are taxed on their worldwide income, even while residing abroad, so a U.S. citizen living in Canada must report the home sale to both the IRS and the Canada Revenue Agency (CRA).

• Canadian Tax: The gain is often fully exempt due to the PRE.
• U.S. Tax: The gain above the $500,000 (joint) exclusion is taxable, regardless of its status in Canada.
• Foreign Tax Credits: U.S. citizens may be able to claim a foreign tax credit for taxes paid to Canada to mitigate double taxation, but if no tax is owed in Canada due to the PRE, there is no foreign tax to credit. The U.S. tax liability is therefore generally unavoidable on the portion exceeding the exclusion.

Example: U.S. Citizen Couple in Canada with Large Gain

Scenario:
A married U.S. citizen couple who have lived in Montreal, Canada, for over 20 years purchased a home for $500,000 CAD. They sell their home in 2025 for $2,000,000 CAD. The exchange rate is 1.30 CAD/USD (for simplicity).

• Purchase Price (USD equivalent): $500,000 / 1.30 = ~$384,615
• Sale Price (USD equivalent): $2,000,000 / 1.30 = ~$1,538,462
• Capital Gain (USD): $1,538,462 – $384,615 = $1,153,847

Canadian Treatment:

• The entire gain is tax-free under the principal residence exemption if the home was their principal residence for every year owned.

U.S. Treatment:

• Compute the gain for U.S. tax: $1,153,847
• Apply the married exclusion ($500,000): $1,153,847 – $500,000 = $653,847 taxable capital gain for U.S. tax.
• Tax Rate: Up to 20% long-term capital gains tax; likely plus 3.8% Net Investment Income Tax (NIIT).
• Estimated U.S. tax liability:
  • Capital gains tax (20%): $653,847 × 20% = ~$130,769
  • NIIT (3.8%): $653,847 × 3.8% = ~$24,845
  • Total estimated U.S. tax: ~$155,614

They cannot claim a foreign tax credit because no actual Canadian tax was owed due to the PRE. As a result, this U.S. citizen couple would face a significant U.S. tax bill on the sale—despite the transaction being fully exempt in Canada.

What if only one of the spouses was not a U.S. citizen – For U.S. citizens living in Canada, capital gains on the sale of a principal residence can trigger U.S. tax once gains exceed the U.S. $250,000 exemption. A planning opportunity exists where the U.S. citizen spouse transfers their ownership interest in the Canadian home to the Canadian (non-U.S.) spouse. Since the Canadian spouse is not subject to U.S. capital gains tax, this strategy can eliminate the U.S. tax exposure on future appreciation while still preserving Canada’s principal residence exemption. This would constitute a taxable gift and the requirement by the U.S. citizen spouse to file a U.S. gift tax return – IRS Form 709 for any gift that would exceed the 2025 annual exclusion of $190,000 to their non-citizen spouse.  If the principal residence is now held by the non-U.S. citizen spouse upon sale, U.S. capital gains would no longer apply to the U.S. citizen spouse.

Key Takeaways and Planning Pointers

• U.S. citizens living in Canada face unique challenges—the U.S. home sale exclusion does not fully shelter large gains on foreign principal residences if those gains exceed $500,000 (joint).
• Canadian PRE is more generous: it may exempt the entire gain regardless of size, whereas the IRS sets a hard-dollar cap.
• Tax Planning: Explore options such as timing the sale, spousal transfers (in some cases), or deferring income to manage capital gains exposure. However, the “U.S. tax shadow” always follows U.S. citizens abroad.
• Reporting: Always report the sale appropriately on both Canadian and U.S. returns, completing all necessary forms and designations.
• Consult professional tax advisors like those at Cardinal Point to coordinate cross-border planning, as tax treaties and credits can be nuanced in application.

In summary:
Selling a principal residence in Canada is typically tax-free for Canadians, but U.S. citizens must grapple with the U.S. capital gains regime, including reporting and paying tax on gains above the IRS exclusion—often with no offsetting Canadian tax paid. Strategic planning and understanding the rules in both jurisdictions are essential to avoid unexpected tax bills and comply fully with both countries’ authorities.

Five ways to deduct donations in the U.S. with OBBBA changes

There are five ways for individuals to deduct charitable donations on a U.S. tax return.

• charitable donation deduction in addition to the standard deduction;
• itemized deductions;
• qualified charitable distributions from an IRA;
• funding a Donor Advised Fund (DAF); and
• funding a Charitable Remainder Trust, or a CRAT.

The first two are do-it-yourself. The next three require custodians.

First – some foundational information and concepts

A tax-deductible donation includes a completed gift of:

• Cash, check, funds charged to a credit card;
• Appreciated securities or other similar capital gains property (valued at FMV);
• New goods, such as food, tools, clothing, etc. (at cost);
• Used property in serviceable condition, or with a salvage value in the case of vehicles (valued at the benefit conferred on the charity e.g., thrift store value); and
• Your mileage and out of pocket expenses to perform charitable work

You may not deduct anything for the time and expertise you devote to charitable volunteer work, without also including that amount in your income. You can’t deduct the cost of lottery or raffle tickets even if you don’t win because these are games of chance and not completed gifts. If you receive goods or services in exchange for your donation, for instance dinner tickets, you must deduct the fair market value of those goods or services to calculate the actual net charitable donation.

Helping someone through a GoFundMe, while admirable, does not count as a tax-deductible donation. The recipient organization must be a qualified charitable organization, such as a 501(c)(3) public charity. The IRS has a tool to look up organizations to see if they are a legitimate tax-exempt organization eligible to receive tax-deductible donations. Qualified organizations are generally nonprofit groups with a religious, charitable, educational, scientific, or literary purpose, or which protect the rights and safety of people or animals. Political organizations and campaigns are not qualified to receive tax-deductible donations. You must receive a receipt for your donation at or around the time of your gift, not when you have to respond to an audit.

Qualifying charitable organizations are organized or created under the laws of the United States, a U.S. state, the District of Columbia, or any possession of the United States. If you have income from Canadian, Mexican, or Israeli sources, you may be able to deduct donations to charities organized in those countries, subject to percentage income limits of your income from those countries. Foreign charities qualify if they would have qualified had they been organized in the United States. For Canada, this would mean that they are a ‘registered charity.’

Donations to Canadian and Mexican charities are limited to the same percentage of AGI as applies to U.S. charities but considering only Canadian and Mexican sourced income. Donations to Israeli charities are limited to 25% of your income from Israeli sources.

Limits on deductions vary based on what you are donating and to whom you are donating.

At a very high level, non-cash donations (stuff) are limited to 30% of your Adjusted Gross Income (AGI). Cash donations to public charities are limited to 60% of AGI. Donations to private foundations are limited to 30% of AGI. Donations of appreciated property at FMV to public charities are limited to 30% of AGI. Donations of appreciated property at FMV to private foundations are limited to 20% of AGI. There is also a 100% (50% to private foundations) of AGI category for conservation property donated by farmers and ranchers.

Donations should be deducted first in the year in which they are made. Unused donations (over the AGI limit) will be carried forward for up to 5 years (15 years for conservation property).

A half of 1% of AGI threshold for itemized charitable contributions was introduced by the OBBBA and comes into effect for 2026 tax returns. This will operate similarly to the 7.5% of AGI threshold for medical expenses.

Next – back to our five ways of deducting charitable contributions

1) A Charitable Donation Deduction for non-itemizers was first introduced in 2020 to encourage donations during the pandemic. In 2020, any filer could deduct up to $300 of charitable donations in addition to the standard deduction. This changed to $300 for single filers and $600 for joint filers in 2021. For 2022 through the present, this additional deduction was not allowed on the federal return, but several states offered a comparable deduction. OBBBA has brought the deduction back for tax years 2026 and forward. The amount of cash charitable donations that may be deducted in addition to the standard deduction is limited to $2,000 for joint filers and $1,000 for all others. This is not available for gifts of property.

2)  Not many people itemize deductions these days, because the standard deduction is very generous and is usually more advantageous than itemizing. Itemized deductions are comprised mainly of:

• Medical expenses over a 7.5% AGI threshold
• State and local taxes (SALT) subject to a Cap between $10,000 and $40,000, depending on your income
• Mortgage and investment interest (also subject to caps)
• Disaster and casualty losses (subject to thresholds and haircuts)
• Charitable donations (subject to income limits)

From 2018 through 2024, most people only itemized if they had catastrophic medical expenses or sizeable donations. With the raise of the SALT cap, we will need to look at the math again.

Assuming that you intend to itemize deductions because of your donations, keep in mind that your charitable donations will be subject to a 0.5% of AGI threshold starting in 2026. A time-tested strategy is to make the bulk of your donations every other year and take the standard deduction in the intervening years. 2025 would be a good year to itemize to avoid the threshold in 2026. Also in 2026, the tax benefit for itemized charitable contributions will be capped at 35%, even if the taxpayer is in the 37% bracket.

3)  If you are at least 70 ½ years old and have an IRA, you can divert up to $105,000 (each for 2025) to a qualified charity, annually. This is called a Qualified Charitable Distribution (QCD). QCDs cannot be made to a donor-advised fund or a private foundation. A QCD is a tax-free IRA distribution, bypasses itemized deductions and is not subject to the 0.5% threshold that starts in 2026. QCDs must be made directly from the IRA custodian to the charity.

Assume a married couple, John and Mary, are both over 70 ½ years of age and each have a Required Minimum Distribution (RMD) of $36,000 in 2025. They each have their IRA custodian redirect $30,000 of that RMD to a qualified charity as a QCD. Their 2025 tax return will show IRA income of ($36,000 – $30,000) x 2 = $12,000 instead of $72,000. They will still be eligible for the MFJ standard deduction of $31,500 and the additional standard deductions of $1,600 each for being at least 65 years of age. If their joint income is under $350,000, they will qualify for an Additional Seniors Deduction of up to $6,000 each.

Using the QCD to reduce AGI in high income years opens the door to other AGI-based benefits. With a lower AGI, you may also pay less for Medicare.

4)  A Donor Advised Fund (DAF) allows you to take an itemized deduction for the year in which you contribute to the DAF – subject to all the 60% / 30% AGI limits, 0.5% threshold and carry-over provisions explained above. However, the funds may be held in the DAF, grow tax-free, and be granted to the qualified charities over time. You can use a DAF as a way of bunching your charitable contributions to make itemizing worthwhile in a particular year, while providing stable yearly funding to your favorite organizations. Donor Advised Funds are professionally managed by a custodian. You, as the donor, decide how much and to whom funds are granted.

5) Charitable Remainder Unitrusts (CRUTs) are strictly structured trusts that allow you a tax deduction in the year the CRUT is formed and funded as long as the amount the charity will receive at the end of the trust term is at least 10% of the FMV of the original contribution to the trust. These are most often used to defer gains on large, appreciated assets since the assets funding the CRUT are transferred in at the donor’s basis, not FMV. The rules are a bit complex and beyond the scope of this article.

Another trust vehicle is the Charitable Remainder Annuity Trust (CRAT). Both CRUTs and CRATs are irrevocable and subject to detailed rules and annual tax return reporting.

Gift Tax Returns

Qualified charitable contributions do not reduce your lifetime gift and estate tax exemption. If you otherwise are required to file a gift tax return, for instance to super-fund a 529 plan or to split ‘taxable’ gifts, your charitable contributions should be reported on that gift tax return but marked as charitable and excludable.

Key Takeaways

If your charitable donations are modest and you do not have significant medical expenses or SALT deductions, take advantage of the additional charitable donation deduction of up to $2,000 per couple.

However, if your charitable giving is more substantial, consider pulling as much giving into your 2025 tax year before the 0.5% threshold kicks in. A donor-advised fund might be right for you.

If you have Required Minimum Distributions for this year, consider making your donations as QCDs instead of itemizing, to both avoid the 0.5% floor and reduce your AGI – and therefore your tax burden.

Every taxpayer’s situation is different and may involve multiple country considerations. The team at Cardinal Point are wealth planning and U.S. – Canada cross-border specialists. We follow the continually evolving tax laws, cutting through the rhetoric to help our clients make the most of their opportunities. Talk to your Private Wealth Manager to better understand what will work best for you.

You’ve spent the majority of your career employed in the U.S. and are ready to return home to Canada with notable retirement assets in hand. For Canadian residents holding U.S. Individual Retirement Accounts (IRAs), Qualified Charitable Distributions (QCDs) offer a rare opportunity to optimize charitable giving while minimizing tax burdens. This strategy leverages unique provisions in the Canada-U.S. tax treaty to create a “double benefit”: avoiding U.S. taxation while potentially claiming Canadian tax credits. Here’s how it works:

Understanding Qualified Charitable Distributions (QCDs)

A QCD allows IRA owners who are taking Required Minimum Distributions (RMDs) from their IRA to transfer funds directly to a qualified charity. The result is that the RMD amount would not be subject to ordinary income tax. Key mechanics of this strategy include:

• Annual limit: Up to $108,000 per person in 2025 (adjusted periodically for inflation).
• RMD satisfaction: A QCD can be used to meet your Required Minimum Distribution (RMD). Even though RMDs now start at age 73, you can make a QCD starting at age 70½. Any QCD you make after turning 70½ will count toward your RMD for that year.
• Direct transfer requirement: Funds must move trustee-to-charity; personal receipt invalidates the tax benefit.
• Eligible charities: U.S. 501(c)(3) organizations and Canadian registered charities.

Key Components of U.S. Tax Treatment

• Tax exclusion: QCD amounts are excluded from U.S. taxable income. Report your total IRA distribution on Line 4a of IRS Form 1040, and the taxable portion (total minus QCD) on Line 4b. Write “QCD” next to Line 4b to indicate the exclusion.
• No charitable deduction: You can’t “double-dip” with a U.S. deduction, meaning you can’t take an “above the line” deduction and also claim on Schedule A if you happen to itemize your taxes.
• Reporting: The full distribution appears in Box 1 on IRS Form 1099-R, but only the non-QCD portion is taxable (Box 2a).

Key Components of Canadian Tax Treatment

The Canada-U.S. tax treaty (Article XXI) creates a powerful synergy:

• Non-taxable in Canada: Since QCDs are tax-free in the U.S., they’re generally non-taxable in Canada.
• Charitable tax credit eligibility: You may claim a Canadian tax credit for the donation amount, subject to:
  • Canadian charities: Full credit under Canadian limits up to a maximum of 75% of net income (Quebec is 100%).
  • U.S. charities: Credit limited to 75% of your U.S.-source income.

The “Double Benefit” in Action

Consider a Canadian resident with $50,000 in U.S.-source income who makes a $20,000 QCD to a Canadian hospital:

1. U.S. outcome: $0 tax on the distribution
2. Canadian outcome: Charitable credit worth ~$8,000–$9,000 (varies by province).
   Result: $20,000 to charity + ~$8,500 tax savings

Eligibility and Execution Checklist

1. 1. Age: Must be 70½ or older at the time of the QCD distribution.
   2. IRA type: Traditional or Inherited IRAs (if the beneficiary is over age 70½)
   3. Charity verification:
      • Canada: Confirm Canadian charity registration via the CRA Charities Listing tool.
      • U.S: Confirm U.S. 501(c)3 eligibility via the Tax Exempt Organization Search tool.
   4. Transfer protocol: Instruct your U.S. IRA custodian to:
      • Make the check payable to the charity (not you) – If the distribution is paid to you first, it does not qualify as a QCD and will be fully taxable in both the U.S. and Canada. You may still be able to claim a Canadian charitable tax credit.
      • Include your name and address in the memo field.
   5. Documentation: Obtain written acknowledgment from the charity for your records. Furthermore, maintaining meticulous records is essential. Keep copies of:
      • The IRA custodian’s confirmation of the direct transfer;
      • Your IRS 1099-R showing the distribution; and
      • Any correspondence with the charity regarding the use of funds.

      This documentation will be invaluable if you are ever audited by the CRA or IRS, or if you need to substantiate your claim for the Canadian charitable tax credit.

   6. Tax Return Disclosure Requirements
      • U.S. Taxpayers: If a U.S. taxpayer claims a deduction for a donation to a Canadian charity under Article XXI, they must disclose this treaty position to the IRS. This is done by filing IRS Form 8833 (Treaty-Based Return Position Disclosure) along with their tax return.
      • Canadian Taxpayers: Canadian residents claiming a credit for a donation to a U.S. charity should:
        • Report the donation on the appropriate line of their T1 return (Line 34900); and
        • Ensure the donation does not exceed 75% of their U.S.-source income for the year.

Limitations and Pitfalls

• Non-deductible IRA funds: QCDs can only offset taxable amounts; after-tax contributions don’t qualify.
• Foreign charity limits: Donations to U.S. charities only reduce Canadian tax on U.S.-source income, up to 75% of U.S. sourced income.
• Provincial variations: Quebec may require additional forms for non-Canadian donations.
• Timing: Transactions must clear by December 31st to count for that tax year.
• CRA Review: It is likely that the CRA will review the donation as part of their overall Review Letter process. Therefore, it is important to ensure that you have the necessary documentation to provide to the CRA upon review.

Strategic Considerations

1. RMD optimization: Use QCDs for RMDs to avoid pushing yourself into higher tax brackets. Furthermore, if your IRS Schedule A U.S. itemized deductions are less than the U.S. standard deduction, the QCD still allows the donor to reap a tax benefit.
2. Cross-border philanthropy: Donate to Canadian charities for maximum tax efficiencies.
3. Income sourcing: Pair donations to U.S. charities with U.S.-source income (e.g., rental properties, royalty income, investment income, etc.).
4. Mitigating Currency Risk: Given the fluctuations in the USD/CAD exchange rate, timing your QCDs can also be a strategic decision. If the U.S. dollar is strong relative to the Canadian dollar, your donation will go further when converted to CAD, increasing the impact of your gift to a Canadian charity. Some donors choose to monitor exchange rates and make larger QCDs in years when the currency environment is favorable, maximizing both their charitable impact and the value of their Canadian tax credit.
5. Charitable Giving as a Family Legacy: QCDs can also play a role in your estate and legacy planning. By making charitable distributions directly from your IRA, you not only reduce the size of your taxable estate but also demonstrate philanthropy to your heirs. For families with a tradition of giving, incorporating QCDs into your annual charitable strategy can be a meaningful way to involve children and grandchildren in philanthropy, teaching them about both cross-border finance and the value of giving back.

Case Study: The Practical Impact

Sarah, 72, a Canadian resident with a $1.2M IRA:

• Annual RMD: $45,000
• QCD strategy: Directs $20,000 to an eligible Canadian university
• Tax results:
  • U.S.: $25,000 taxable income (vs. $45,000 without QCD)
  • Canada: $20,000 charitable credit + $0 tax on distribution
• Net benefit: ~$7,000 Canadian tax savings + $5,000 U.S. tax savings

The Importance of Cross-Border Financial Advice

For Canadian-resident IRA owners over 70½ or in the RMD distribution phase, QCDs represent one of the most tax-efficient charitable strategies available. By combining U.S. tax exclusion with Canadian credits, you amplify the impact of your philanthropy while minimizing your tax burden.

You should coordinate your reporting to ensure the QCD maximizes tax savings and impact in both Canada and the U.S. Working with a cross-border tax and financial planning professional such as Cardinal Point is strongly recommended. Cardinal Point can help you:

• Confirm the eligibility of your chosen charity;
• Structure your QCDs for optimal tax efficiency;
• Navigate reporting requirements in both countries; and
• Address any estate or succession planning considerations.

By taking a proactive, well-documented approach, you can ensure that your charitable giving is both impactful and tax-efficient, turning your IRA into a powerful tool for cross border philanthropy and financial planning.