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, WNY, as well as Toronto,
Canada. For more detailed information on this or other cross-border accounting issues,
call Marlies @ 716-694-3500.
Renting Canadian Real Estate: US citizens who intend to rent property situated in
Canada are subject to a non-resident withholding tax of 25% 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 less expenses, excluding depreciation. The 25% withholding is applied
to the NET amount and if there is a rental loss no withholding is required. The section
216 return reports gross rent less allowable rental expenses in accordance with 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 US
tax returns, report your Canadian rental income on Schedule E of the US 1040.
Credit for either the withholding tax or tax computed on the Section 216 return
may be claimed on IRS Form 1116.
Sale of Canadian Real Estate: Capital gains realized by a US 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 form 1116 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.
WOW. This is a great example of why we need experts involved in our financial lives.
And although Canadian tax compliance is an added administrative cost of investing in
Canadian real estate, it does not have to be overwhelming to you because of subject
matter experts like Marlies Hendricks.
(Please note this is a very brief review of a complicated subject. In this, as in all tax, legal, and
financial situations, it is important to discuss your personal situation with your team of subject
matter experts before taking any action. For more information or assistance with cross border
Canadian and/or US tax filings please feel free to contact Marlies at 716-694-3500 to schedule a