Taxes for U.S. Owners of Canadian Property: Renting, Selling & Reporting
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.
Whether you rent out a Canadian cottage, hold an investment property, or plan to sell, the guidelines below cover what U.S. citizens and residents need to know on both sides of the border. For broader cross-border filing help, see our cross border tax preparation & accounting services.
U.S. Citizens Renting Canadian Real Estate
Non-Resident Withholding Tax on Gross Rental Income
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.
Reducing Withholding with CRA Form NR6 (Section 216 Election)
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.
Reporting Canadian Rental Income in Your U.S. Tax Return
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 who live in Canada while renting property face additional filing considerations, covered on our U.S. citizens living in Canada page.
U.S. Citizens Selling Canadian Property
Capital Gains Tax on the 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.
Section 116 Withholding & CRA Information Circular IC 72-17R6
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 Canadian Tax Liability on the Sale
One-half of capital gains net of selling costs are subject to tax. For individuals, the maximum federal rate on a capital gain is approximately 24.4%, reflecting the top 33% federal bracket applied to the 50% taxable portion, plus the 48% non-resident surtax that applies in place of provincial tax.
Reporting the Sale of Canadian Property on Your U.S. Tax Return
Because Canadian real estate held by a U.S. person is taxable in both countries, the sale must be reported on your U.S. return in addition to filing in Canada. A foreign tax credit can be claimed on the appropriate IRS forms for the Canadian tax paid, so the same gain is not taxed twice. Coordinating the Section 116 prepayment, the final Canadian return, and the U.S. reporting is where most cross-border errors occur. Our team handles both sides of the filing - see our personal tax preparation services or contact us directly to review your situation.
