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Tax Issues: Canadians Owning Rental Property in the U.S.

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Tax Issues: Canadians Owning Rental Property in the U.S.

 

Tax Issues:  Canadians Owning Rental Property in the U.S.

November 14, 2011

1.0 Summary.  As a Canadian owning rental property in Nevada you will have to file income taxes in the United States.  The type of return you file depends on the number of days you spend in the U.S. and your other connections to the U.S. compared to Canada.   Generally, the U.S. only taxes you on the source income from the rental and at the rates U.S. citizens are subject to.  You will be able to take a credit for the U.S. taxes paid on your Canadian tax return.  However, if you don’t file form 1040NR and make an election to treat the income as effectively related to a business then you will be taxed a flat rate of 30% on your gross rental income without a deduction for expenses. 

1.1 Canadian Income Tax Rules.  You will have to claim the income received from your U.S. rental property on your Canadian tax return.  You must report all income from sources received inside and outside Canada for the year.   You can receive a foreign tax credit for taxes paid to the IRS.  For more information on reporting foreign income on your return see the CRA’s General Income Tax and Benefit Guide form 5000-G.  You must also complete Form T1248, Information About Your Residency Status (Schedule D), and attach it to your Canadian return.

1.2 United States Income Tax Rules.  The US income tax rules for Canadians depends on whether you qualify for the resident alien or non-resident alien status.  The IRS uses the substantial presence test to determine if you are a resident alien or a non-resident alien of the U.S. for tax purposes.

1.3 Substantial Presence Test.  This test uses the number of days you were in the U.S. during a three-year period (the current and the two previous years) to determine if you are a resident alien or a non-resident alien.  If you spend more than 30 days in the U.S. during the year the IRS might consider you a resident alien.  There are several factors and exceptions to the substantial presence test please seek tax advice for determining your status.  Even if the substantial presence test determines you are a resident alien you can file form 8840 with the IRS claiming you have more connections with Canada and therefore should not be considered a resident alien.

1.4 Resident Alien Status US Tax Consequences.  Resident aliens have to file a U.S. tax return to report income from all sources inside and outside the U.S. for the year.  You will file as a resident alien and report all income including your rental income on IRS form 1040.

1.5 Non-Resident Alien Status U.S. Income Tax Consequences.  Non-Resident Aliens only report U.S. source income on their U.S. income tax returns.  As a non-resident alien, you are subject to U.S. income tax on rental income you receive from U.S. real property.

1.6 Effectively Connected v. Not-Effectively Connected.  The IRS divides your income into two categories:  1) Effectively connected with a trade or business and 2) not effectively connected with a trade or business.  Rental income is not effectively connected with the conduct of a U.S. trade or business.  However, you can elect to treat rental income as income that is effectively connected with the conduct of a U.S. trade or business by attaching a letter to Form 1040NR stating that you are making the election.

1.7 Income Effectively Connected.   Income that is effectively connected with a trade or business in the U.S. (including income from the sale or exchange of U.S. real property) is taxed at the same rates that apply to U.S. citizens and residents.  If you have filed the election your U.S. rental income will be treated as income effectively connected.

1.8 Income Not Effectively Connected.  Income that is not effectively connected with a trade or business in the U.S., but is from U.S. sources (including interest, dividends, rents, and annuities) is taxed at 30% of gross income.  If you do not make the election to treat your rental property as effectively connected your property manager should withhold 30% of your gross income from your rental.

1.9 Further Information.  For more information regarding income taxes for Canadians owning rental properties in the U.S.  see the following publications:

IRS Circular 230 Notice: To ensure compliance with requirements now imposed by the Internal Revenue Service of the U.S. Treasury Department, we are hereby informing you that any federal tax advice contained or perceived contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. 

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About the Author

Mr. Arlint is a tax attorney, he is a partner in the law firm Arlint & Armstrong and President of Arlint CPA. His practice areas include income tax, estate tax, and IRS representations.

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