I am not Canadian but know a little about this. The law in question is the Foreign Investment in Real Property Tax Act (FIRPTA).
When a foreign owner of US real estate sells that real estate, that owner is required to pay the capital gains tax on the sale, 15% of the net profit from the sale if the timeshare was owned for more than a year. In the typical timeshare sale, that actual tax is often little to nothing because net profit is determined by taking current sale price and subtracting from it certain costs of sale such as the broker's fee and some of the closing costs paid by seller and also subtracting the seller's "basis" for the real estate which is the total of the original purchase price the seller paid plus certain closing costs he paid at the time of that sale. (Note, annual dues are not deductions for capital gains tax purposes.) Thus, unless your current sale price is quite a bit higher than your originally paid for the timeshare, your taxes will be low or nothing.
To assure the foreign seller pays any taxes owed, FiRPTA actually requires the buyer to withhold a percentage of the sale price (currently 15%) and turn that over to the IRS (the US tax authority). Then the seller can seek its return after the sale. However, in reality today what actually happens when you have a broker that knows what it is doing (usually the case with any
DVC timeshare sale using a recognized DVC timeshare broker like the The Timeshare Store) is the following:
1. As part of the sale, the foreign seller needs to get a US tax number from the IRS (for US citizens that is a social security number) so the seller can make any necessary filings to get return of any money. Brokers have access to the forms necessary for the seller to apply for that tax number (the forms can also be found online). That is a process that can take up to several weeks because the IRS is not known to rush any such applications and thus it is best to apply promptly after the seller retains the broker.
2. When the sale is being done, an escrow account with a bank is set up (usually by the broker) to hold any of the purchase price amount paid by the buyer until the sale closes. The buyer's down payment and then final payment near closing goes into that account.
3. After closing, the seller gets whatever is left in that account after broker's fees and closing costs and less a withholding equalling the 15% of sale price required to be withheld or (highly unlikely for a timeshare) equalling the projected actual capital gains tax if it happens to be more than that 15% of sale price.
4. Right after closing, the broker or closing company with the seller, using the seller's tax ID number, submits forms the seller signs showing the actual calculation of any capital gains taxes owed and, if any is owed, a check for payment of such taxes actually owed, and requests the IRS to accept that filing and thus waive the required submission of 15% of the sales price. Once again the IRS may take several weeks but usually you get a response that the submission is accepted and then whatever is remaining in the escrow account is paid to the seller.
