3- U.S. real estate

Rental Income

Rental income paid to Canadian taxpayers in respect of a real property located in the U.S. is subject to a 30% U.S. federal withholding tax without any relief under the Canada – United States Tax Treaty. The withholding is calculated on the gross rent, before any deduction of expenses incurred to earn that income.

The U.S. rules are numerous and complex. Do not hesitate to contact your tax advisor if you plan to rent a property, including a condominium, located in the United States.

However, taxpayers may elect to file a U.S. tax return to be taxed on their net rental revenues (income less expenses) rather than be subject to the 30% withholding tax. Such an election applies to all rental income and is generally irrevocable. Taxpayers must comply with American rules with respect to filing date and expense deductibility. Unlike under the Canadian rules (see Section VII), capital cost allowance is mandatory in the U.S. and must be claimed in the current year even if it creates a rental loss. If the allowance is not claimed, it will still be deemed to be deducted for purposes of calculating the U.S. capital gain.

The tax paid in the U.S. may be eligible for a foreign tax credit in the taxpayer’s Canadian income tax return of a resident of Canada (see Section VII).

Some American states collect sales tax on the rental of real property located in the United States and require a tax return to be filed reporting the rental income.

Sale of Real Estate

When a Canadian sells real estate located in the U.S., the American rules⁵ provide for a 15% withholding tax for federal purposes on the gross selling price. Provided the selling price is under US$300,000, the withholding tax does not apply when the purchaser or a member of his or her family occupies the residence for 50% or more of the days that the property is used by any individual for each of the two first 12-month periods following the sale date.

If the American income tax on the gain from the sale of the property will be less than the 15% withholding tax, the taxpayer may get a certificate from the American tax authorities in order to only pay the actual income tax on the transaction. For this purpose, a completed Form 8288-B – Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests – must be sent to the Internal Revenue Service before the sale showing the income tax the taxpayer has to withhold instead of 15%. The Internal Revenue Service should issue a withholding exemption certificate within 90 days of receipt of the application.⁶

A U.S. federal income tax return must be filed before the deadline that applies to the taxpayer to declare the sale. Lastly, a state income tax return must generally be filed when selling property in the United States because most states tax dispositions of real property located on their territory.

⁵ Some states also apply withholding tax at the time of sale.

⁶ Sometimes the processing time is longer. In such a case, the IRS notifies the taxpayer within the initial 90-day period.