Common

Canadian Rental Income

US residents who own rental property in Canada must report the income on both their US and Canadian returns. Canada taxes non-residents on Canadian-source rental income, while the US taxes residents on worldwide income. Proper coordination via foreign tax credits prevents double taxation.

Key Points

  • Report gross rental income and expenses on US Schedule E and Canadian Section 216 return.
  • File an NR6 form with CRA to have tax withheld on net (not gross) rental income.
  • Without an NR6, Canada withholds 25% on gross rents under Part XIII.
  • Currency conversion is required for all amounts reported on the US return.
  • Capital cost allowance (CCA) in Canada corresponds to depreciation on Schedule E.

Action Items

  1. 1.File Form NR6 with CRA to reduce withholding to net rental income.
  2. 2.File a Canadian Section 216 return by June 30 of the following year.
  3. 3.Report all rental income on US Schedule E, converting to USD.
  4. 4.Claim foreign tax credits on Form 1116 for Canadian taxes paid on the rental income.
  5. 5.Track adjusted cost base in both CAD and USD for eventual disposition.

Frequently Asked Questions

Can I deduct the same expenses on both returns?

Yes. You claim parallel deductions on both the Canadian Section 216 return and US Schedule E. The foreign tax credit mechanism prevents double taxation on the net income.

What happens when I sell the rental property?

You must report the capital gain on both returns. Canada requires a Section 116 clearance certificate for non-resident property dispositions, and you claim a foreign tax credit on the US side.

Related Scenarios

Critical

TFSA US Tax Trap

The Tax-Free Savings Account is tax-exempt in Canada but receives no treaty protection in the US. The IRS classifies a TFSA as a foreign grantor trust, requiring Forms 3520 and 3520-A annually. Failure to file can result in penalties starting at $10,000 per form per year.

Critical

FBAR Filing Requirements

The Report of Foreign Bank and Financial Accounts (FBAR) must be filed by any US person with foreign financial accounts exceeding $10,000 in aggregate at any point during the year. The FBAR is filed electronically with FinCEN, not the IRS, and has its own deadline and penalty regime.

Core

Substantial Presence Test

The Substantial Presence Test (SPT) uses a weighted formula across three years to determine if a foreign national is a US tax resident. If you meet the test, you are taxed on worldwide income. Understanding the SPT is essential for snowbirds and anyone splitting time between Canada and the US.

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