The disposition of Canadian real estate poses more significant income tax issues to a US resident. Unlike the United States, Canada imposes tax on the basis of residency, not citizenship. However, non-residents of Canada may be subject to income tax on incomes from employment exercised in Canada, incomes from businesses carried on in Canada, and gains realized on dispositions of ‘taxable Canadian properties’. Canada also imposes tax on certain types of passive income (including renting, royalties, and interest) paid by Canadian residents to non-residents of Canada. A US purchaser of Canadian real estate will eventually be subject to Canadian income tax on the disposition of direct or indirect interests in real estate that are ‘taxable Canadian property’. Real property or real estate situated in Canada is the most common example of ‘taxable Canadian property’. Shares of Canadian corporations or interests in resident or non-resident partnerships or trusts that derive most of their value from Canadian real estate will also be considered taxable Canadian property. Shares of US corporations deriving greater than 50% of their value from Canadian real estate are also considered to be taxable Canadian property. Capital gains are subject to a preferred rate of taxation in Canada. A capital gain is determined by deducting from the proceeds of disposition, the taxpayer’s ACB (tax cost) in the property, and any outlays or expenses made or incurred in connection with the sale. One-half of the capital gains (referred to as ‘taxable capital gains’) is included in the calculation of income for Canadian tax purposes. Assuming they had no other income subject to Canadian income tax, US-resident individuals would pay Canadian federal tax on taxable capital gains realized in 2004 at marginal rates ranging from 20.5% (on the portion of taxable capital gains below $30,000) and 43.7% (on the portion of the taxable capital gain exceeding $100,000). At top marginal rate, the effective rate of tax imposed by Canada on the capital gain would be 21.85% (43.7% times 1/2). With some limitations, US residents should be able to deduct the Canadian income taxes as a credit against their US federal tax liability in respect of the gain realized on sale. The same may not hold true for any state taxes that may be payable by the US individual on the gain, as some states, such as California, do not grant foreign tax credit relief to their residents for the purposes of computing state income taxes.