Withholding Tax on Rental Income Paid to US Persons in Canada
If you are an American investor in the Canadian rental market, you are required to pay income tax in Canada. Generally, when you receive rental income in Canada, the payer (the tenant or an agent) has to withhold non-resident tax at the rate of 25% on the gross rental income and remit to the Canada Revenue Agency (CRA) on or before the 15th day of the month following the month the rental income is paid or credited to you. However, if you manage your own rental property, you are responsible for remitting the withholding tax on time.
You will receive two copies of an NR4, Statement of Amounts Paid or Credited to Non-Residents of Canada from your payer or agent showing the gross amount of rental income during the year and the amount of non-resident tax paid. However, if you do not have an agent, you may request NR4 Pro Forma from the CRA.
Generally, the non-resident tax withheld is considered your final tax obligation to Canada. However, you may elect under section 216 of the Income Tax Act to file a Canadian tax return and pay tax on your net rental income, which may result in your paying less tax. Your section 216 return is usually due within two years from the end of the year.
Cross-Border Discrepancies: Deducting Depreciation From Rental Income in Canada and the US
US and Canada have different rules for deducting depreciation from rental income. In general, tax depreciation is discretionary in Canada, and the amount is limited to the extent of the net income before depreciation, whereas in the US, depreciation is mandatory. As a result, you may have a different net income for Canadian tax purposes and for US tax purposes. Since you are required to include Canadian rental income on your US tax return as a US person, it is important to utilize the Canadian taxes paid on the US tax return in the most tax-efficient way. The Canadian tax paid can be used as a foreign tax credit for US federal tax purposes, but the credit may not be available for some states that do not honour the US-Canada Tax Treaty.
You should speak to your cross border advisor, like MCA, if you already have a Canadian rental property or if you are planning to invest in the Canadian rental market.
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MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.