US Rental Income Tax for Canadians: Your First Year, Step by Step

A Canadian who owns a US rental owes tax on that income in the US and reports it in Canada too. The treaty and the foreign tax credit keep the same income from being taxed in full twice. This post follows the paperwork in the order it shows up in your first year. It's general information, so have a cross-border accountant check it against your situation.

The default is 30% of gross rent

If you do nothing, rent paid to a foreign owner is subject to a flat 30% withholding on the gross amount. There are no deductions for mortgage interest, repairs or property tax. On most rentals that takes more than the property earns.

The net election

You can choose to be taxed on the net rent at regular graduated rates, like a US landlord, by making the election for real property income. It takes two parts:

1. A W-8ECI. You give this form to the person paying you rent, usually the property manager, and they stop withholding the 30%. The form needs a US taxpayer number to be valid.
2. A Form 1040-NR. You file it each year, with a statement making the election attached to the first one. The return reports the rent and deducts the expenses and depreciation.

File the first return on time. If you file more than 16 months after the original due date (extensions don't count), you can lose your deductions. Once you make the election, it stays in effect every later year until you revoke it, and after the first few years you need IRS approval to revoke.

The ITIN comes first

You don't have a Social Security Number, so you apply for an ITIN on Form W-7. The IRS says seven weeks, or nine to eleven weeks if you apply between mid-January and April 30 or from outside the US. You live outside the US, so plan on nine to eleven weeks. Ask your accountant whether you can apply before your first return or whether the W-7 has to go in with it. Until you have the number, the property manager can't use a valid W-8ECI, and they may withhold the 30%. You recover the excess on your first return. Read more in the ITIN entry.

What the return looks like

Here's an illustrative first year on a US$150,000 house with a US$112,500 loan at 8%.

On paper that's a small loss, so little or no US tax for the year, even though the property still produces cash because depreciation isn't a cash cost. The table uses a full year of depreciation to keep the math simple, and your first year will be a little lower because the IRS treats the property as placed in service mid-month. Without the election, 30% of the gross rent would have been US$5,220. Your numbers will differ, and if your rental shows a loss, the passive loss rules can park it and carry it forward, so ask your accountant how it's treated.

State returns

States with an income tax usually want a non-resident return on rent earned there. Florida, Texas and Tennessee don't tax individual income, so there's nothing to file. See the state comparison.

The Canadian side

You report the rent on your Canadian return too, on form T776, converted to Canadian dollars. The CRA's default is the Bank of Canada rate on the day of each transaction, and it may accept an annual average if you have many small payments and the rate stayed steady. Then you claim a foreign tax credit on form T2209 for the US tax you paid. In many cases the US tax on a small net profit is lower than your Canadian rate, so you pay the US amount to the IRS and the difference to the CRA.

If the total cost of your foreign property passes C$100,000 at any point in the year, you also file form T1135 with your return. A US rental held as an investment counts.

Claiming capital cost allowance in Canada is optional, you can't use it to create a rental loss, and it can come back as recapture when you sell. Your accountant will want to weigh that against the US depreciation.

Deadlines to put in your calendar

• US return (Form 1040-NR): generally June 15 if you have no US wages with withholding, with extensions available.
• Canadian return: April 30 for most people, with the T776 and T2209 attached.
• T1135: the same day as your Canadian return.
• ITIN: before the first rent payment, if you can manage it.

Dates move when they land on weekends and holidays, and extensions change them, so check the current ones.

Keep records for the sale

Save the closing statement, receipts for improvements and the depreciation you claim each year. You'll need them when you sell, and selling a US rental as a Canadian explains why. For the foundations, start with the main guide for Canadian investors.