US Tax Obligations for Canadians Holding Real Property in US
If you’re a Canadian national and own US properties from which you also earn monthly rent, it will be mandatory for you to pay your US withholding tax, which is 30% of the gross rent. However, you can alternately choose to pay tax on your rental income if you receive the rent on a net basis. But in this case you are obligated to pay a US tax return at the end of the rental year – declaring your net rental income. If you elect to pay tax on your net rental income with Internal Revenue Service and provide all information of it to your tenant, you will not have to pay the 30% withholding tax. But your decision will be considered as permanent, and the decision can only be revoked in light of special circumstances defined by the IRS.
A majority of people of who own US property for rental purposes automatically assume that as their expenses are always likely to exceed the total rent they receive, they don’t have to file for their taxes or withhold the tax at source. The IRS has made it mandatory that the real estate agent or a property manager who collects the rent for the non-resident should be primarily responsible to ensuring that the taxes are paid and report to the IRS in case any tax withheld from the rental source of income.
Should the non-resident consistently fail in filing for his tax return, his property manager will be responsible for the due that remain outstanding, which also includes interest payments and other penalty charges. Moreover, the non-resident owner of the property will also lose all this right to claim any sort of deduction, which includes a 30% of the gross rent.
Furthermore, different from the Canadian tax structure, the US has made depreciation deduction mandatory. So, if you fail to file your tax returns, you will be deemed to claim the depreciation and will also be liable to recapture. Failing to file your withholding or rental income tax can also diminish your ability to move your passive activity expenses and losses forward, which primarily because of the fact that the IRS will have no prior record of those losses. As a direct result of that, on a potential sale of your property, you may have a taxable income payable – which translates into a recapture with no off-setting expenses carried forward.
The Bottom Line
When recession hit the American economy back in 2007-8, the debt load ridiculously increased to historical levels in the country. And the government tasked out to ensure that they can implement measure to increase tax revenues. And in order to do that, the US government started to impose tax restriction from non-residents and foreigners, making it obligatory for them to disclose all their financial details. And given how close US- Canadian borders are, a majority of foreigners that are taxes are Canadians.
And this means that it is crucial for them to remain cognizant of the tax situation of the US and seek experts and specialized tax advice.
