The sellers can request a reduced withholding rate if they anticipate that their final tax liability will be less than the withheld amount. For this purpose, form 8288-B must be submitted and accepted by Internal Revenue Service (IRS).
Form 8288-B, Application for Withholding Certificate for Disposition by Foreign Persons of U.S. Real Property Interests, requires a U.S. Individual Income Tax Number (ITIN). The taxpayer must apply for ITIN using W7. IRS has strict supporting documents requirements for ITIN applications. Canadian taxpayers have often complained about the back and forth of the ITIN applications, or rejections due to incomplete or erroneous ITIN applications.
If your ITIN application is rejected or requires corrections, the withholding certificate issuance will be delayed. In order to save time, you can apply for U.S. ITIN using Certifying Acceptance Agent (CAA) Services in Canada.
The IRS takes significant time to process (around 90 days) Form 8288-B to issue the withholding certificates, therefore, proper planning ahead of the sale is important. Once the withholding certificate is issued, the excess funds are released from the escrow.