ARTICLE | June 25, 2026

A Common Planning Scenario

Consider a Canadian holding company that owns shares of a U.S. corporation. If the U.S. corporation’s value is derived primarily from U.S. real estate, those shares may be treated as a U.S. real property interest (USRPI) under U.S. tax rules.

Now assume the Canadian shareholder transfers the holding company shares as part of an estate freeze, succession plan, or internal restructuring. From a Canadian tax perspective, the transaction may qualify for rollover treatment and proceed without immediate tax.

From a U.S. tax perspective, however, the same transaction may be viewed very differently.

What looks like a routine internal reorganization in Canada may be treated by the IRS as a taxable disposition of a U.S. real property interest.

Why This Catches Taxpayers Off Guard

Many taxpayers associate U.S. real estate taxation with direct ownership of land or buildings. But FIRPTA reaches further than that.

Under the Foreign Investment in Real Property Tax Act, gain realized by a foreign person on the disposition of a U.S. real property interest can be subject to U.S. tax. That definition can include not only real estate itself, but also shares of a U.S. corporation whose value is primarily attributable to U.S. real estate.

That means a share transfer within a Canadian corporate structure can trigger U.S. tax consequences even where no property is sold directly and no Canadian tax is payable at the time of the transaction.

The Consequences can Extend Beyond the Tax

When FIRPTA applies, the issue is rarely limited to gain recognition alone.

A transaction may also trigger:

• U.S. tax on the gain
• FIRPTA withholding under IRC § 1445
• U.S. filing and reporting obligations
• Timing mismatches between Canadian and U.S. tax treatment
• Additional compliance costs and professional fees after closing

These issues are particularly frustrating because they often arise in transactions that were intended to be straightforward and tax-efficient. By the time the problem is identified, the legal steps may already be complete and the planning flexibility may be gone.

Planning May Exist, but Only if Addressed Early

In some cases, there may be planning opportunities to improve the U.S. result. For example, certain Canadian corporations may be eligible to make an election under IRC § 897(i), which can change how FIRPTA applies.

But this is not a simple checkbox exercise. The election is technical, depends on treaty and structural requirements, and can have consequences beyond the immediate transaction. It should be evaluated only as part of a broader cross-border review.

The Takeaway

The most expensive cross-border tax problems are often not aggressive transactions. They are ordinary reorganizations in which Canada recognizes a rollover and the United States recognizes a taxable event.

When U.S. real estate is involved, directly or indirectly, Canadian tax treatment should never be assumed to determine the U.S. result.

Bottom Line: Before implementing a Canadian reorganization involving U.S. real estate interests, the U.S. tax analysis should be done at the same time as the Canadian analysis—not after the transaction closes.