Tax implications for Americans who move to Canada with US property and rent it out as Canadian Residents
In my previous blogs, I discussed the tax implications for Canadian non-residents owning Canadian rental property and the considerations at the time of departure from Canada. In this blog, I would like to now shift the focus to U.S. residents who own U.S. property and decide to keep it following a move to Canada.
The first question is: what are the tax implications of keeping a U.S. property and renting it out as a Canadian resident? First, regardless of whether you are a Canadian or U.S. citizen who has moved from the U.S. to Canada, you will always be required to file ongoing U.S. tax returns every year to report the rental income to the IRS.
According to the U.S.-Canada tax treaty, when it comes to real estate, taxation rights are based on the location of the rental property, which means the IRS in the U.S. has the first right to tax the rental income. But then Canada also taxes the same income because Canadian residents must declare and pay tax to CRA on their worldwide income. Not to worry though, because the tax paid to the IRS and any state tax paid is typically eligible to be claimed as a foreign tax credit on the Canadian T1 return which alleviates the risk of double taxation. For non-U.S. citizens, the IRS withholding tax rate is typically 30% on the gross rental income, unless your cross-border accountant elects to file Form W-8 ECI along with the 1040-NR return. In that case, you would only be required to pay tax on the net rental income.
Second, for Canadian tax purposes, on the date of your arrival to Canada, you are deemed to have sold and then re-acquired all your property under the “deemed acquisition” rules. Therefore, the new cost basis for your U.S. rental property will be adjusted to the fair market value as of the date you move to Canada, which gets calculated in CAD based on the applicable exchange rate on the date of move. This cost basis adjustment further helps to reduce the risk of double taxation issues on U.S. property. It’s also important to note that any U.S. rental properties (as opposed to personal-use properties) must be disclosed on CRA form T1135 “Foreign Income Verification Statement.”
Lastly, it is important to note that for U.S. tax purposes, it is mandatory to claim depreciation on rental properties. For Canadian tax purposes, claiming depreciation (known as “Capital Cost Allowance” (CCA)) is optional. On the U.S. return, depreciation is calculated based on the original purchase value (unless you are classified as a “Covered Expatriate.”) On the Canadian tax return, CCA is claimed based on the stepped-up cost basis value on the move to Canada date. Since claiming CCA may lead to recapture issues in the future, it is essential to consult a cross-border tax or financial consultant to determine whether it is worthwhile to claim CCA on your Canadian tax return. This will help reduce mismatches with foreign tax credits when you decide to sell the U.S. property.
There are often many cross-border planning options available, especially when one spouse is a U.S. citizen and the other is a Canadian citizen. Due to the complexities of cross-border tax issues, it’s important to consult with cross-border financial planners and accountants before deciding to move from the U.S. to Canada, particularly if you plan to keep your property as a rental. Planning ahead can provide significant benefits.
