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A deal is being floated, and it has a price tag
Canadian homebuilders want something American homeowners have had for a century. In late August, the Building Industry and Land Development Association met privately with Finance Minister Francois-Philippe Champagne and asked Ottawa to let buyers of newly built homes deduct their mortgage interest from taxable income. Over the life of a mortgage, that could be more than $100,000 of deductions.
There is a condition attached, and it is the interesting part. The deduction would be linked to the principal residence exemption. Elect to take the interest, and an amount equivalent to what you deducted becomes taxable when you sell. Decline it, and you keep the exemption whole.
To be clear about what this is: a lobbying proposal. Not policy. Finance has not announced a consultation, released draft legislation, or said anything publicly about it. It may go nowhere.
But it is worth paying attention to anyway, because it puts a number on something Canadians almost never think about. The principal residence exemption is the most valuable tax break most Canadian families will ever use, and it is so familiar that it has become invisible. Asking people to trade part of it away is the first time in a long while that anyone has made them price it.
And if you file a US return, you have already made that trade. Nobody asked you.
Two countries, two different bargains
Canada and the United States made opposite choices about housing, and both choices are internally consistent.
Canada does not let you deduct mortgage interest on your home. In exchange, when you sell your principal residence, the entire gain is exempt. No cap. No limit. A house bought for $300,000 in 1995 and sold for $2,000,000 today produces $1,700,000 of gain and zero tax, provided the designation is made properly.
The United States does the reverse. It lets homeowners deduct mortgage interest, subject to limits on the size of the loan. And then it taxes the gain on sale, with an exclusion rather than an exemption. Under Section 121 of the Internal Revenue Code, a single filer can exclude US$250,000 of gain and a married couple filing jointly can exclude US$500,000. Above that, it is a capital gain like any other.
Neither system is more generous than the other in the abstract. They just pay you at different points in the transaction. The problem arrives when one person is standing inside both systems at once.
The cap that has not moved since 1997
The Section 121 figures were set in the Taxpayer Relief Act of 1997. They were US$250,000 and US$500,000 then. They are US$250,000 and US$500,000 now.
They are not indexed to inflation. That is not an oversight anyone has rushed to fix, and there have been attempts. The More Homes on the Market Act would have doubled the figures and indexed them. The No Tax on Home Sales Act, introduced in 2025, would remove the caps altogether. Both are sitting in committee. Administration officials floated a capital gains cut on home sales, which would require Congress. As of today nothing has changed.
Meanwhile the median American home has roughly tripled in price since 1997. A cap that exempted almost everyone when it was written now bites a meaningful number of long-tenured owners, and it bites cross-border owners harder than anyone.
The qualifying tests are worth knowing precisely, because they are less forgiving than people assume. You must have owned the home for at least 24 of the last 60 months, and used it as your main residence for at least 24 of the last 60 months. Those periods do not have to overlap. For a married couple filing jointly, only one spouse needs to meet the ownership test, but both must meet the use test individually. And you generally cannot claim the exclusion if you already excluded gain on another home sale within the prior two years.
Where this lands for a US person living in Canada
Here is the shape of the problem.
Section 121 applies worldwide. A US citizen or green card holder living in Toronto who sells their Toronto home is entitled to the exclusion on that Canadian house. That is the good news, and it is real.
Canada exempts the whole gain. The United States exempts the first US$250,000 or US$500,000 of it. Everything above that is taxable in the US.
Now the part that makes this different from ordinary double taxation. Normally, when two countries tax the same income, you pay the higher of the two rates and the foreign tax credit sorts out the rest. That mechanism needs Canadian tax to exist before it can be credited. Canada charged nothing on this sale. There is no credit to claim. The US tax on the excess gain is simply owed, out of pocket, with nothing to offset it.
It is one of a small number of situations in cross-border planning where the treaty and the credit system, which usually work well, have nothing to offer. Add the Net Investment Income Tax on the excess, and the bill grows further.
The currency problem, which runs in both directions
This is the part that catches people who have already done their homework on the cap.
The United States computes the gain in US dollars. Not by taking the Canadian-dollar gain and converting it at the end. It translates the purchase price at the spot rate on the day of purchase, each capital improvement at the rate on the day it was paid, and the proceeds at the rate on the day of sale. Three different exchange rates, sometimes decades apart.
Which means the Canadian-dollar gain and the US-dollar gain are different numbers, and they can point in different directions.
Consider a home bought and sold for exactly the same Canadian-dollar price. No gain at all in Canada. If USD/CAD was 1.40 on the day of purchase and 1.25 on the day of sale, the loonie strengthened, and the same Canadian dollars translate into more US dollars at the end than at the beginning. On a $1,000,000 house that is roughly US$86,000 of gain, invented entirely by the exchange rate, on a transaction where you made nothing.
Run the loonie the other way and the exposure moves rather than disappearing. A Canadian-dollar mortgage repaid in a currency that has weakened against the US dollar can produce a separate foreign-currency gain under Section 988, which is taxed as ordinary income, computed independently of the house, and not sheltered by the Section 121 exclusion. This one is less settled than the property calculation and practitioners frame it differently, so it is a question to put to your accountant rather than a rule to assume. But it is the direction the loonie has been travelling: USD/CAD moved from 1.3866 to 1.3988 across the middle of September and is now above the 1.40 handle.
Neither effect is intuitive, and neither shows up anywhere in the Canadian paperwork.
The designation year that non-residents lose
One more Canadian rule catches people moving across the border, and it is easy to miss because it looks like a technicality.
The principal residence exemption formula includes a bonus year, commonly called the plus-one rule, which exists so that a family buying one home and selling another in the same year does not lose a year of exemption. It normally works automatically.
For dispositions after October 2, 2016, a taxpayer who was not resident in Canada for the entire year in which the property was acquired does not get that extra year. Someone who bought a Canadian property while living in the United States and later moved home to sell it can find a year of exemption quietly missing from the calculation.
More broadly, the exemption is only available for years in which you were resident in Canada. Departure and return both leave marks on the arithmetic, and CRA directs cases involving non-resident periods to specialist assistance for a reason.
What this means if the proposal ever becomes real
Suppose Ottawa did adopt some version of what the builders are asking for. A buyer of a new home elects to deduct mortgage interest and accepts a reduced exemption on sale.
For a Canadian-only taxpayer, that is a straightforward present-value calculation. Deductions now, at your marginal rate, against tax later on an amount you can estimate. Reasonable people will land on different sides of it depending on their rate, their horizon and what they expect the property to do.
For someone who also files in the United States, the calculation changes shape. The Canadian exemption you would be giving up is the one that was doing all the work. The US exclusion is capped and was never going to cover a long-held property in Toronto or Vancouver anyway. Trading Canadian exemption for Canadian deductions, when the US is already taxing the top slice of the gain, is a materially different decision from the one a domestic buyer is being offered.
It is also, for now, hypothetical. The point is not to plan around a lobbying proposal. The point is that the exemption has a value, most people have never had to put a number on it, and anyone with a US filing obligation should know theirs.
The practical version
If you have a US filing obligation and own a Canadian home, four things are worth doing before a sale rather than after.
Know your US-dollar cost base. Not the Canadian number. The purchase price translated at the rate on closing day, plus improvements translated at their own dates. Find the documentation now, while it still exists.
Know which exclusion applies to you. Single or married filing jointly is a US$250,000 difference, and the use test has to be met by both spouses individually.
Ask your accountant about the mortgage, specifically, and separately from the house.
And have the conversation before you list. Almost every lever here, from the timing of a sale to how a property is held to whether a filing status is available, closes the moment the transaction completes.
The Canadian answer to “do I pay tax when I sell my home” is one of the few tax answers most people are certain about. That certainty is correct, and it is only half the question.
Frequently Asked Questions
Do I pay US tax when I sell my Canadian home?
If you are a US citizen or green card holder, yes, potentially. Section 121 lets you exclude US$250,000 of gain as a single filer or US$500,000 as a married couple filing jointly, and it applies to a home anywhere in the world. Gain above that is taxable in the United States. Because Canada exempts the gain entirely, there is usually no Canadian tax to claim as a foreign tax credit against it.
Is the US$250,000 home sale exclusion indexed to inflation?
No. The US$250,000 and US$500,000 figures were set by the Taxpayer Relief Act of 1997 and have never been adjusted. Several bills to raise or remove the caps have been introduced, including the More Homes on the Market Act and the No Tax on Home Sales Act, but none has been enacted.
How does the exchange rate affect US tax on a Canadian home sale?
The US calculates the gain in US dollars, translating the purchase price, each capital improvement and the sale proceeds at the spot rate on their own dates. That means the US gain and the Canadian gain are different numbers. If the loonie is stronger on the day you sell than it was on the day you bought, a sale that was flat in Canadian dollars can produce a taxable gain in US dollars.
Can I deduct mortgage interest on my home in Canada?
Not on a personal residence. Canada does not permit a mortgage interest deduction for a principal residence, and in exchange exempts the full gain on sale. Homebuilders asked Ottawa in August 2026 to create a deduction for buyers of newly built homes, with a corresponding reduction in the principal residence exemption, but that is an industry proposal and not government policy.
Do I still have to report the sale if the whole gain is exempt?
Yes, in both countries. In Canada, dispositions from 2016 onward must be reported on Schedule 3 with Form T2091(IND) to claim the principal residence designation, and missing it can require an amendment and attract a penalty. In the United States, the sale must be reported on Schedule D and Form 8949 if a Form 1099-S was issued, even where the gain is fully excluded.
What is the plus-one rule and why might I lose it?
The principal residence exemption formula adds one bonus year so that a family selling one home and buying another in the same year does not lose exemption. For dispositions after October 2, 2016, a taxpayer who was non-resident in Canada throughout the year the property was acquired does not receive that extra year. It matters most for people who bought a Canadian property while living abroad.
Sources
The Globe and Mail, developers lobby Ottawa for mortgage-interest tax changes on new homes. https://www.theglobeandmail.com/business/article-developers-lobby-ottawa-for-mortgage-interest-tax-changes-on-new-homes/
Internal Revenue Service, Topic no. 701, Sale of your home. https://www.irs.gov/taxtopics/tc701
Internal Revenue Service, Publication 523, Selling Your Home. https://www.irs.gov/publications/p523
Canada Revenue Agency, Principal residence and other real estate. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate.html
Canada Revenue Agency, Income Tax Folio S1-F3-C2, Principal Residence. https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html
Canada Revenue Agency, Form T2091(IND). https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2091ind.html
Bank of Canada, daily exchange rates. https://www.bankofcanada.ca/rates/exchange/daily-exchange-rates/
Congress.gov, H.R. 4327, No Tax on Home Sales Act. https://www.congress.gov/bill/119th-congress/house-bill/4327
Disclaimer
This article is for general informational purposes only and reflects conditions as of September 21, 2026. It is not investment, tax, or legal advice, and it does not account for your personal circumstances. Sartorial Wealth Inc. does not prepare tax returns. Please consult qualified professionals regarding your own situation.
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