Cross-border Tax Strategies for Rental Property Investment
Your questions answered by KeatsConnelly
With the increasing movement of people and capital across the borders between US and Canada whether for work or investment purposes, a number of rental property owners face the enigma of tax strategies on both sides of the border. To help these landlords demystify the complexities, we’ve sought the expertise of KeatsConnelly, a cross-border financial planning and tax accounting firm with offices in both the US and Canada. They answered some of the most commonly asked questions from our cross-border landlords.
Commonly Asked Questions from Cross-Border Landlords
1. Do I have to file taxes in Canada and/ or the US if I own properties across the border?
If you own a property in your personal name and are using the property to generate income in either country, there are filing requirements. Also, if the property is titled in an entity such as a corporation or partnership, there may be filing requirements regardless if the property is used personally or to generate income.
If you are buying or selling property as a non-resident of either Canada or the US, we recommend that you speak to a cross-border specialist as soon as possible to talk about potential filing requirements, suggestions on titling the property, withholding of income from rent or a sale, and planning opportunities.
2. What tax advantages are there in owning and renting out a property in the US vs in Canada?
In some cases, a person may argue that renting in the US may be advantageous to renting in Canada due to the comparably higher marginal tax rates in Canada. However, others may argue that selling property in Canada may be advantageous to selling in the US due to the comparably higher capital gains tax rates in the US.
Either way, the Canada/US Tax Treaty allows persons and entities to have effectively connected income in either country and eliminate or reduce double taxation.
3. For any travel-related expenses I incur traveling across the border to and from the rental property location, which side of the border and tax authority do I claim the expenses under (i.e. I live in the US and travel to Canada for landlord related tasks)?
If travel expenses are specific to a rental property or other business activity, they should be claimed on the filing associated with that property or business.
For example, if you are a Canadian citizen with a rental property in the US and you travel to the US with the purpose of maintaining the property, your travel expenses associated with the US rental property are claimed on your US return. Personal expenses such as meals and entertainment are not fully deductible.
If traveling is not completely for business reasons, there may need to be a calculation of percentage of business versus pleasure.
4. Is there a rule of thumb I should be aware of in terms of what I claim in Canada vs US tax forms when it comes to filing the rental income and business activities?
Normally, your non-resident income and activities are claimed/filed first. In your resident country, you would then claim worldwide income. For example, a Canadian resident (individual) and a US non-resident (individual) has a filing deadline in Canada of April 30th and a US filing deadline of June 15th for persons outside of the US. The Canadian filing cannot be filed until the US filing is completed. The dates provided are only for individuals and not for entities. There are some additional filings that are necessary in the US and Canada and we recommend that you speak to a cross-border specialist to ensure that you are in compliance with Canada Revenue Agency (CRA) and Internal Revenue Service (IRS).
5. How does filing taxes in Canada for a rental property differ from filing taxes in the US?
There are a few deductions that are allowable in the US that are not in Canada. There are also some mandatory expenses in the US that are optional in Canada such as depreciation in the US and cost allowance in Canada. You can review the IRS (Schedule E) and CRA (Form 216) regulations for the complete list of allowable expenses or speak with an accountant.
6. What tax saving advice could you offer a landlord when it comes to cross-border tax filing?
Talk to a cross-border specialist prior to buying a property or creating an entity to assist in planning and titling your property that best suits your situation and goals. Completing tax filings the wrong way can cause double taxation. But, with the proper planning, you can effectively minimize the tax of the highest marginal tax rated country, which is Canada, in most cases.
7. Do I need to find an accountant that can deal with IRS taxation?
If you are a Canadian dealing with US tax filings or vice versa, it is best you speak with a cross-border specialist to determine what expertise is necessary for your situation.
8. How much more should I budget to have an accountant do my US rental property related taxes?
It is a good idea to see an accountant about your taxes but the cost for an accountant really depends on how many properties are owned, how they are titled and other factors. It is best to use accountants for tax strategies and expertise rather than for bookkeeping. You can save money on your accounting bill by preparing information far in advance of your meeting and asking questions that will help you maximize your tax return.
9. Are there ways I can save money when I see an accountant?
Keep clean, organized records. To learn more about preparing for tax filing, read our blog post on Tax Preparation Tips: Staying Organized (Part 1).
If you have more questions about owning and renting properties across the border, we recommend these books:
- “The Border Guide: Ad guide to Living, Working and Investing across the border” by Robert Keats
- “A Canadian’s Best Tax Haven: The US” by Robert Keats
- “Taxation of Canadian’s in America: Are you at risk?” by Dale Walters, Sally Taylor and David Levine.
- “Buying Real Estate in the US” by Dale Walters.
Cross-border tax guidelines for your reference:
- Cross-Border USA Tax Guidelines
- Canada Tax Form – T776: Statement of Real Estate Rentals
- USA Tax Form – F1040: US Individual Income Tax Return