Selling a Short-Term Rental You Ran From Across the Border: Recapture, Withholding, Lodging-Tax Close-Out, and the Order to Do It In

The short-term rental's sale is the transaction where every regime the property touched sends a final bill, and the seller who lists first and thinks later meets them out of order. The checklist, sequenced. Before listing. Characterization check: a Canadian property with heavy short-term use (substantially all of its use in taxable short-term accommodation) may be commercial real property for GST/HST purposes, so that its sale is a taxable supply — the seller must charge GST/HST on the sale price (or the buyer self-assesses if registered), and a seller who didn't know faces a 5-15% liability on the price; the STR guide flags this exit trap, and the pre-listing analysis (the property's use history, the registration status, the buyer's registration) decides whether GST/HST applies and how the agreement allocates it — with the option, where the property's use can be changed to long-term residential before sale for a sufficient period, of exiting the commercial characterization first (a change-in-use with its own self-supply consequences, analyzed before it's done). Withholding certificate application: the non-resident seller of US property applies for a FIRPTA withholding certificate (Form 8288-B) as soon as the sale agreement is signed — the certificate reduces the 15%-of-gross-price withholding to the actual tax on the gain, and takes weeks the closing timeline must accommodate; the non-resident seller of Canadian property applies for the section 116 certificate (Form T2062, and T2062A for the depreciable portion, because a property on which capital cost allowance was claimed has a recapture component computed separately) with the gain and recapture computed and the tax paid or secured. Recapture computation, both countries. US: the depreciation allowed or allowable on the building (the rental playbooks — mandatory in effect, so the seller who never claimed it is still recaptured on what was allowable) is recaptured at the unrecaptured section 1250 rate (up to 25%) for a US person or for a nonresident alien's effectively connected gain, and any cost-segregation accelerated depreciation on personal property components is recaptured as ordinary income (the FIRPTA-and-cost-seg guide); the balance of the gain is long-term capital gain. Canada: capital cost allowance claimed on the building is recaptured in full as income (not half-included — recapture is ordinary income to the extent of the CCA claimed) when the proceeds allocated to the building exceed its undepreciated capital cost, and the gain above original cost is a capital gain at the inclusion rate; the purchase agreement's allocation of price between land and building drives the recapture, and the allocation is negotiated with the buyer (who wants building for their own depreciation) rather than assumed. Cross-border credit: the Canadian seller of a US STR reports the US gain and recapture on the T1 (Schedule 3 for the gain, with the Canadian computation from the Canadian cost base and CCA history — which may differ from the US figures) and credits the US tax; the US-resident seller of a Canadian STR reports the Canadian gain and recapture on the 1040 (US computation from US basis and US depreciation) and credits the Canadian tax — with the two computations differing in amount and character and the credit running on the overlap. Close-out of the operating regimes. Lodging and occupancy taxes: the state and local accounts (Florida's Department of Revenue transient rental tax account, the county tourist development tax account, the municipal registration — the STR guide's stack) are closed with final returns through the last rental date; the seller who leaves them open accrues estimated assessments and penalties on a property they no longer own. GST/HST account (Canada): the registrant's final return with the deemed-disposition-on-deregistration computation for any capital property retained (the GST account guide), or the continued registration if other supplies continue; the sale's own GST/HST treatment per the characterization check. Platform accounts: the Airbnb or other platform listing closed, the payout account reconciled to the year's income for both returns, the platform's tax documents (the US 1099-K; the Canadian platform reporting) retrieved before the account closes and access ends. Deposits and prepaid bookings: future bookings cancelled or assigned to the buyer under the agreement, guest deposits refunded or transferred, and the income recognized in the correct year. Insurance and licensing: the STR licence cancelled or transferred per the municipality; the commercial STR insurance ended at closing. At and after closing. The withholding applied per the certificate (FIRPTA's 15% or the certificate's lower amount remitted by the buyer on Forms 8288 and 8288-A within 20 days; section 116's holdback released against the certificate); the sale reported in both countries in the year of closing (the 1040-NR or 1040 with the gain, recapture, and FIRPTA credit; the T1 with Schedule 3, the recapture, and the credit — or the reverse); the T1135's final year for the property; and the FBAR and 8938 for the year the sale proceeds sat in a foreign account. The order, condensed: characterization and GST/HST analysis → withholding certificate application at signing → recapture computed and the land-building allocation negotiated → regimes closed with final returns → closing with withholding per certificate → both countries' returns with credits. The failure sequence is the reverse: list, sell, discover GST/HST on the price, discover 15% withheld with no certificate applied for, discover recapture on depreciation never claimed but allowable, discover a tourist tax account still accruing — each a repair, and each avoidable by a checklist run before the listing photos.

Key takeaways

• Before listing: the GST/HST characterization check for a heavily rented Canadian property (a taxable sale, or a change-in-use exit), and the withholding certificate application (FIRPTA 8288-B, or section 116 T2062/T2062A) the moment the agreement is signed.
• Recapture in the country that allowed depreciation: US — allowed or allowable depreciation at the unrecaptured 1250 rate, cost-seg components as ordinary income; Canada — CCA recaptured in full as income, driven by the negotiated land-building allocation.
• Two computations, one credit: the gain and recapture computed independently under each country's basis and depreciation rules, with the foreign tax credit on the overlap.
• Close the operating regimes: lodging-tax accounts with final returns, the GST/HST account, the platform listing (documents retrieved first), deposits and bookings, licensing and insurance — before the property changes hands.
• At closing: withholding per the certificate (FIRPTA remitted by the buyer on 8288/8288-A; the 116 holdback released against the certificate); then both countries' returns, the final T1135, and the FBAR/8938 for the proceeds.
• The order is the product: characterization → certificate → recapture and allocation → close-outs → closing → returns; the reverse order is a sequence of repairs.

The STR exit checklist

Pre-listing: use history and GST/HST characterization; withholding certificate strategy; recapture estimate both countries; land-building allocation position. At signing: certificate application filed; closing timeline set to the certificate; lodging-tax and platform close-out dates fixed. Pre-closing: final lodging-tax returns; platform documents retrieved and listing closed; deposits and bookings resolved; licence and insurance ended. Closing: withholding per certificate; holdback mechanics. Post-closing: both returns with credits; final T1135; FBAR/8938 for the proceeds' account. A two-page document, opened the day the seller decides to sell — not the day the offer arrives.

Worked example

A Windsor couple sells their Gulf Shores STR condo (bought for US$310,000, sold for US$480,000, four years of cost-segregated depreciation) and, the same year, their Kingsville lakehouse STR (bought for C$400,000, sold for C$720,000, 85% short-term use, CCA claimed on the building). Gulf Shores: the 8288-B filed the day the agreement was signed — the certificate arrives before closing, reducing the withholding from US$72,000 (15% of price) to the actual tax on the gain and recapture (about US$38,000, with the cost-seg components recaptured as ordinary income and the building's depreciation at the 1250 rate); Alabama and Baldwin County lodging-tax accounts closed with final returns; the platform's 1099-K downloaded and the listing closed; the buyer remits the certificate amount on Form 8288; their 1040-NR reports the gain and recapture with the withholding credited; their T1 reports the Canadian computation (from the CAD cost base at the purchase-date rate, with a larger CAD gain from currency movement) and credits the US tax. Kingsville: the pre-listing analysis shows 85% short-term use — commercial real property for GST/HST; the couple, registered, structures the sale to a registered buyer who self-assesses (no cash GST/HST at closing), documented in the agreement; as residents, no section 116; the land-building allocation negotiated at 40/60, the CCA recaptured in full as income on the building portion, the balance a capital gain; the GST/HST account closed after the sale with the final return; the municipal STR licence surrendered; the platform listing closed. Both properties, one checklist, no surprises — and their neighbor's Gulf Shores sale the same season, listed and closed in six weeks with no certificate application, had US$75,000 withheld at closing and recovered fourteen months later on a 1040-NR the couple hadn't known they'd need.

Official sources

The CRA explains the GST/HST rules for businesses, including that most supplies of goods and services made in Canada are taxable at the applicable rate, that exports of goods and many services supplied to non-residents are zero-rated, and that registrants charging 0% on zero-rated supplies remain entitled to input tax credits on their related purchases. — Canada Revenue Agency, GST/HST for businesses, https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses.html

"The disposition of a U.S. real property interest by a foreign person (the transferor) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding." — Internal Revenue Service, FIRPTA Withholding, https://www.irs.gov/individuals/international-taxpayers/firpta-withholding

Practitioner note

The cross-border STR's sale is a sequence, and the sequence starts before the listing: the GST/HST characterization of a heavily rented Canadian property, the withholding certificate application at signing, the recapture in the country that allowed the depreciation, and the close-out of every lodging-tax and platform account. Our exit checklist is two pages opened the day the client decides to sell, because every item on it is cheap in that order and a repair in the reverse.

See also: For selling a Florida home before or after a move back to Canada, see selling a Florida home before or after a move back to Canada; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the STR exit engagement — GST/HST characterization and structuring, withholding certificate applications, dual recapture and gain computations with allocation negotiation, operating-regime close-outs, and both countries' sale-year returns with credits. See cross-border pricing or book a call.