Tax Implications of Renting Your Property
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 form W8ECI which will eliminate the 30% withholding tax. By filing a W8ECI, your taxes from your rent will be assessed when you file your U.S. income tax return and the tax payable will be based on the gross rents less ordinary expenses including depreciation (and thereby lowering the amount subject to tax at the marginal rate). Click here for instructions on completing a W8ECI. 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.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. It is highly recommended that you consult with an accounting firm that specializes in Canadian and American cross border taxation.
Selling Your Property
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.
Filing Requirements
For income tax purposes, a Canadian must file a U.S. tax return and report the gain on the sale of U.S. real estate. A credit may then claimed for the FIRPTA tax withheld. U.S. tax on the sale of U.S. property will generate a foreign tax credit that can be used to reduce the Canadian tax on the sale. However, if the amount of the gain taxed in Canada was reduced due to the capital gains exemption or the principal residence exemption, the foreign tax credit available may be limited.
U.S. Taxpayer Identification Numbers (ITINs)
You will be required to file a U.S. income tax return if you have income from a U.S. rental property or you sell your U.S. property. To file a U.S. income tax return, 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. You should never use your Canadian Social Insurance Number (SIN) for U.S. tax filing purposes.
How do I get an ITIN?
To apply for an ITIN, fill in Form W-7 and submit it, together with proof of identity and foreign status, to the IRS. IRS Publication 1915, Understanding ITINs, might be helpful as well as instructions for completing the W-7. For other IRS forms, go to the Forms and Publications page. The easiest way to apply for an ITIN is through an IRS-authorized Acceptance Agents in Canada. These agents can certify that they’ve seen your passport (so you don’t need to send it anywhere) and will also help you complete and submit your Form W-7 without making any mistakes. It is highly recommended that you consult with an accounting firm that specializes in Canadian and American cross border taxation.