Taxes for U.S. Owners of Canadian Property

If you or someone you know is a U.S. citizen (or corporation) that plans to BUY or SELL Canadian real estate, you should understand that Canada, as well as the United States, has specific tax rules which apply. Marlies Y. Hendricks, CPA provides us with some general guidelines. Marlies has offices in Buffalo, NY as well as Toronto, Canada. 

U.S. Citizens Renting Canadian Real Estate

Renting Canadian Real Estate: U.S. citizens who intend to rent property situated in Canada are subject to a non-resident withholding tax on the gross rental. The payer or agent who collects the rent is responsible to remit the tax to the Canada Revenue Agency (CRA) by the 15th of the following month in which the rent is paid or credited. Where the rental income is considered income from property as opposed to business income, subsection 216(4) of the ITA provides for a reduction in withholding by providing annually to CRA Form NR6. The NR6 requires an estimate of the gross rent fewer expenses, excluding depreciation.  The section 216 return reports gross rent less allowable rental expenses under the provisions of the ITA. There are no carryover provisions for rental losses that are available under the IRS code as net operating losses or passive activity losses. For U.S. tax returns, report your Canadian rental income on Schedule E of the U.S. 1040. Credit for either the withholding tax or tax computed on the Section 216 return may be claimed as well.

U.S. Citizens Selling Canadian Property

Sale of Canadian Real Estate: Capital gains realized by a U.S. person on the sale of any Canadian real property interest, regardless if it has been rented, will attract Canadian and US tax. One-half of capital gains are subject to Canadian tax for all investors. IRS forms should be filed to claim a foreign tax credit for the Canadian tax. CRA Information Circular IC 72-17R6 outlines the procedures concerning the disposition of Canadian real estate held by non-residents of Canada. Section 116 of the ITA prescribes a prepayment of 25% on the estimated capital gain on land and building (excluding selling expenses). There is a 50% withholding on recapture of CCA.

Final Tax Liability: One-half of capital gains net of selling costs are subject to tax. For individuals, the maximum rate on a capital gain is approximately 21.46% including the 48% non-resident surtax.