Canadians Owning U.S. Property: Tax Obligations on Both Sides of the Border

Buying a vacation home in Florida or a rental condo in Arizona seems straightforward enough — until tax season arrives. Canadians who own U.S. real estate are caught in two overlapping tax systems: the IRS expects a return whenever you earn U.S.-source income or sell U.S. property, and the CRA expects you to report that same income on your Canadian return as a resident taxed on worldwide income.

Getting this wrong is surprisingly easy. Rental income not reported to the IRS, withholding not arranged on a sale, or an estate that triggers U.S. estate tax — these are common, costly mistakes. This article explains the key Canadian obligations and what U.S. rules Canadians most need to understand.

Renting Out Your U.S. Property

If you rent your U.S. property to tenants, the rental income is U.S.-source income. The IRS taxes it as follows:

Default: Gross Withholding at 30%

By default, a non-resident alien's U.S. rental income is subject to 30% withholding by the property manager or tenant on the gross rental payments. This is often more than the actual tax owed after expenses.

Election: Tax on Net Income

You can file a U.S. tax return (Form 1040-NR) and elect to have your U.S. rental income taxed on a net basis — after deducting mortgage interest, property taxes, management fees, insurance, depreciation, and other allowable expenses. This election generally results in a lower tax bill and a refund of over-withheld amounts. To make it effective, you must file the election and the return within the applicable deadlines (verify with a U.S. tax professional).

Canadian Reporting

You must also report the U.S. rental income on your Canadian T1 return. Canada allows a foreign tax credit (Form T2209) for U.S. taxes paid on the same income, so you generally will not pay full tax twice — but you will pay the higher of the two countries' rates on the same income. Keep meticulous records to support both returns.

Selling Your U.S. Property: FIRPTA

When a Canadian (as a foreign person) sells U.S. real estate, the buyer is required under the Foreign Investment in Real Property Tax Act (FIRPTA) to withhold a percentage of the gross sale price and remit it to the IRS.

The withholding rate is set by the IRS (as of writing — verify the current rate with a U.S. tax professional or IRS publication). The withheld amount is applied against your actual U.S. tax liability, and any excess is refunded when you file your U.S. non-resident return for the year of sale.

To avoid or reduce withholding, you can apply to the IRS for a withholding certificate before or promptly after closing, demonstrating that the actual tax owing is less than the statutory withholding amount. This requires advance planning.

The gain from the sale must also be reported on your Canadian T1 return. Your Canadian adjusted cost base may differ from your U.S. tax basis due to currency fluctuations and cost allocation differences — a cross-border accountant can reconcile both.

U.S. Estate Tax: The Often-Missed Risk

U.S. estate tax is a significant concern for Canadians with U.S. property — and one that is often completely overlooked until it is too late.

The United States imposes estate tax on the U.S.-situated assets of non-resident aliens (which includes most Canadians) above a certain threshold. The threshold for non-resident aliens is much lower than for U.S. citizens and residents — and the applicable credit under the Canada-U.S. Tax Treaty may partially protect Canadians, but only if their overall estate is large enough and the treaty relief is claimed properly.

If a Canadian dies owning U.S. real estate valued above the non-resident threshold (as of writing — verify the current threshold and treaty provisions with a cross-border estate planning professional), a U.S. estate tax return (Form 706-NA) may be required and tax may be owing.

Strategies to mitigate U.S. estate tax exposure include:

• Holding U.S. property through a Canadian corporation (complex — tax and legal advice essential)
• Purchasing life insurance in an amount designed to fund the potential estate tax liability
• Estate planning structures that remove U.S. property from the taxable estate (require qualified U.S. and Canadian counsel)

T1135 Reporting of U.S. Property

If the cost of your U.S. property (combined with any other specified foreign property you hold) exceeds the T1135 threshold (as of writing, generally $100,000 CAD — verify with CRA), you must file Form T1135 annually. Note that vacation property held for personal use is included in the T1135 reporting requirement — the personal-use exclusion does not apply to real estate the way it does to personal-use chattels.

See our companion article on T1135 for full details.

Currency and Cost-Base Complications

All amounts on your Canadian return must be in Canadian dollars. Translating U.S. purchase prices, rental income, and proceeds requires using the appropriate exchange rate (generally the rate on the date of each transaction, or an annual average rate for recurring income). This can create a Canadian capital gain or loss that differs from the U.S. gain or loss purely due to exchange rate movement — even if the property price in USD was unchanged.

Frequently asked questions