Canada – U.S. Income Tax Issues

Renting U.S. Real Estate 

If you own U.S. real estate that you rent out on an annual basis, you will face a U.S. income tax requirement. This requirement can either be fulfilled through the remittance of U.S. withholding tax on 30% of the gross rents or the filing of a U.S. income tax return on the gross rents less ordinary expenses including depreciation – which is a mandatory deduction for U.S. tax purposes. Failure for not remitting withholding tax or filing a U.S. tax return on a timely basis could expose you to additional tax, penalties and interest. Further, as a Canadian resident for income tax purposes, you are also required to file a Canadian tax return on your U.S. rental activity as well. Generally, net U.S. tax paid will be eligible as a foreign tax credit on your Canadian income tax return.

Selling U.S. Real Estate 

If you sell U.S. property, irrespective of whether you have a net gain or loss, you must file a U.S. income tax return to the IRS. Your net taxable result will be the difference between the proceeds of the sale and your cost base – which is your original purchase price plus improvements less any depreciation taken (a mandatory deduction under U.S. laws). If the net result is a gain where the property was held greater than 1 year, generally the maximum long-term capital gain rate of 15% will apply. If the sale proceeds of your U.S. property exceed U$300,000 under the U.S. FIRPTA laws, a 10% withholding tax requirement will be imposed. The reduction of the 10% withholding tax requirement can be achieved commensurate with the actual net tax so long as specific IRS tax forms are filed prior to closing. Certain U.S. states have a similar withholding tax requirement on real estate proceeds as well. Further, as a Canadian resident for income tax purposes, you are also required to file a Canadian tax return to report any capital gains or losses on the sale of your U.S. real estate. Generally, net U.S. tax paid will be eligible as a foreign tax credit on your Canadian income tax return.

U.S. Taxpayer Identification Numbers (ITINs) 

If you are required to file a U.S. income tax return because of the sale or rental of U.S. real estate or to recover withholding tax on U.S. gambling winnings or losses, you will be required to have an ITIN issued by the IRS. An ITIN is often confused with a U.S. Social Security Number (SSN), but the two are completely different. SSNs are issued to U.S. citizens or residents who qualify for legal employment under certain immigration visas. Canadian citizens or snowbirds that are temporary U.S. visitors are generally not entitled to receive a U.S. SSN. You should never use your Canadian Social Insurance Number (SIN) for U.S. tax filing purposes. 

Plan to have your financing pre-arranged … 

If you are paying cash, bring a print out of the source of your funds to close. This can be from a broker account, savings or checking, or an RSP account. Making an offer will require that you submit “proof of funds to close” with the offer, making an offer without this proof is a waste of your time. If you plan to finance a portion of the price you will need to provide a letter of approval, also known as an LSR or loan status report.       

Written by Terry Ritchie