Appreciate the reply.  More to be revealed as I continue my research.  Also open to any suggestion - every little bit helps - it is basically a facts and circumstances exercise at this point.  I believe their original intent was a primary (not a second) residence that morphed into a B&B concept.  Just looking for the hook on which to place my hat either way.  They are allowed to take a position favorable to them supported by the their actions ... 'but for' and all that. 

By the way I encouraged clients to do the FINCEN and related forms which they did - I did not want that responsibility - and have since added that to my engagement letter.

To satisfy your curiosity re Canadian tax treatment:

From the beginning I encouraged clients to engage Canadian tax professional to help.  Even if there was no 'income'.  Reason being there may be filing requirements at local, provincial level 

Upon decision to sell the engaged Canadian CPA and attorney - CPA's do taxes - attorney handles the money - distribution and withholding.

Form sent by CPA were instructions T2062 E (21) Request by Non_Res for Cert of Compliance ... etc   with attachments for each spouse to sign and details showing Proceeds, Adjusted Cost Basis, Gain(Loss), exemptions, Net Gain Loss) and Form T1261 Application for CRA Tax Number for Non-Residents.

I got hooked up with CPAs and inquired if their submittals satisfied all Canadian obligations.  Answer: Yes, all obligations satisfied..  And that because of loss no Canadian tax return was required to be filed.  

I was informed that attorneys on behalf of CRA (Canadian Revenue Authority) with hold 25% of proceeds - even if there was a loss.  And that balance would not be released until long after 2025 US tax due date of April 15, 2026.  

   Thanks again.