US Tax Compliance for Ontario Residents Who Own US Real Property

Owning a condo in Florida or a house in Arizona often feels like a simple lifestyle purchase. For tax purposes, it puts you in two systems at once: the Canadian system that taxes you as an Ontario resident, and the US system that applies to property located there.

This article walks through the Canadian side in plain terms: rental reporting, Form T1135, foreign tax credits and penalties. It also explains where the US side begins, so you know what to ask a US tax adviser.

Two tax systems apply to the same property

Under the Canada-U.S. Tax Convention, income a Canadian resident earns from real property in the U.S. may be taxed in the U.S., and so may gains from selling it. Canada then gives a deduction from Canadian tax for U.S. income tax paid on U.S.-source income.

Separately, Canadian residents must report all income earned from foreign property, whatever its cost. Falling below a reporting threshold does not make the income tax-free.

What the IRS requires of you, such as any US return or withholding on rent, is set by US law. That is a question for a US tax adviser, and it is worth asking before your first rental season rather than after.

Vacation home or rental: why the difference matters

Specified foreign property does not include personal-use property, such as a vacation home used mainly as a personal residence. It also excludes property used or held exclusively in carrying on an active business.

The CRA's Florida condo example shows how this plays out. Each situation below is treated differently.

Because the answer turns on your actual use and your expectation of profit, keep records of rental dates, rates and expenses.

Form T1135 and the cost threshold

Canadian residents, corporations and certain trusts must file Form T1135, Foreign Income Verification Statement, if they own specified foreign property costing more than $100,000 at any time in the year. The simplified Part A applies if the total cost was more than $100,000 but less than $250,000 throughout the year, and the detailed Part B applies at $250,000 or more.

The threshold is based on cost amount, generally the adjusted cost base, not fair market value. The form is due on the same date as your return: April 30 for most individuals, June 15 for self-employed persons, and no later than six months after the end of the fiscal period for corporations.

Mistakes here are costly. Failing to file is $25 per day for up to 100 days, with a minimum of $100 and a maximum of $2,500. A knowing or grossly negligent failure is $500 per month for up to 24 months, to a maximum of $12,000. A false statement or omission is the greater of $24,000 and 5%. The due-diligence exception in section 233.5 does not apply to T1135. A missing or inaccurate form can also extend the CRA's reassessment period by three years if you failed to report income from specified foreign property.

Reporting rental income and claiming foreign tax credits

If you received rental income from real estate, you file Form T776. Gross rents go on line 8299, and the net amount from line 9946 goes on line 12600 of your return. Co-owners each report their share according to their ownership share.

• Current expenses with a short-term benefit are generally deductible in the year incurred.
• Capital expenses are deducted over time through capital cost allowance (CCA).
• Rental buildings are generally Class 1 (4%), and land is not depreciable.
• In the year you acquire the property you can usually claim CCA on only one-half of your net additions to a class.
• CCA cannot be used to create or increase a rental loss.

If you were resident in Canada at any time in the year and paid foreign tax on income you reported, you can claim a federal foreign tax credit on line 40500 using Form T2209, and Form T2036 for the provincial credit. For each country, the federal credit is generally the lesser of the foreign income tax you actually paid and the Canadian tax otherwise payable on your net income from that country.

Where U.S. tax was paid, paper filers are asked to attach a W-2 slip, a U.S. 1040 return and a U.S. tax account transcript. Electronic filers should keep these in case the CRA asks.

What to do next

• Write down how the property was used each year: personal days, rental days and whether you expected a profit.
• Find the original cost, in Canadian dollars, and add up any other US properties or foreign assets to compare with the T1135 thresholds.
• Collect rental statements, expense receipts and any US tax documents.
• Ask a US tax adviser what the IRS requires of you as a non-resident owner.
• Ask a Canadian lawyer or accountant to confirm your T776, T1135 and foreign tax credit filings.

If you have missed a filing in earlier years, speak with a lawyer or accountant before doing anything else, since the right approach depends on the facts.

Frequently asked questions