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Canadian residents face tax on U.S. rental income
Saturday, October 16, 2004
Q. We would like to purchase a condo in Florida to spend our winters down south. In the summer months, we would like to rent out this condo. How will income from this condo be treated from a Canadian and U.S. tax perspective?
A. As a resident of Canada, you'll face tax in Canada on any net rental income earned from the condominium.
In addition, you'll face a 30-per-cent withholding tax in the United States on your gross rental revenue. You can avoid this 30-per-cent withholding tax in the United States by giving a completed copy of IRS Form 4224 to your tenant or property management agent, and electing to use the "net rental income" method of reporting.
Electing to use the net rental income method will allow you to report your net rental income, after claiming deductions, in the United States. This almost always beats paying 30 per cent of your gross rents to the Internal Revenue Service.
This election is made when you file your U.S. tax return for the year, and once you've made the election, it's generally irrevocable, so you'll have to use this method in subsequent years too.
You'll have to file a U.S. tax return, Form 1040NR, by June 15 each year for the prior calendar year rental activities
(U.S. citizens have different filing requirements -- check with a tax professional).
Finally, you'll be able to claim a foreign tax credit on your Canadian tax return for any U.S. tax paid so that you won't be double-taxed.
For more information on the U.S. filing requirements, get a copy of IRS publications 515, Withholding of Tax on Non-Resident Aliens and Foreign Corporations, and 527, Residential Rental Property.
U.S. forms and publications can be found at http://www.irs.ustreas.gov.
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