Canadians with US Property

It seems only natural for any northern bound population to seek southern property to rent or buy for use when the local weather is just too miserable to enjoy. And for Canadians, at least in the eastern half of the country, Florida is the recipient of Canadians trying to thaw out. Here are some statistics to support my claim. The data is two years old but I suspect there’s been no trend reversal.

The Canadian love affair with Florida

8%: percentage of all resale homes in Florida bought by Canadians, 2010$2.1-billion: value of homes, in U.S. dollars, bought in Florida by Canadians, 2010$50-billion: estimated maximum total value of Florida residential real estate owned by Canadians$150,000: median price of homes purchased by Canadians, 201089: percentage of Canadians who paid for their Florida real estate purchases in cash, 2010500,000: estimated number of Canadians who own a home in Florida, including timeshares62: percentage of snowbirds who own a property in Florida59: percentage of Canadians who use their Florida property as a vacation home18: per cent of Canadians who rent their property as an investment

Source: National Association of Realtors, Florida Association of Realtors, Americas Market Intelligence, Consulate General of Canada in Miami

While some of the stats may be surprising, it is not unique for Canadians to own US property. We’ve been going down for decades. What I want to explore in this blog are the potential challenges with owning US property given the IRS interest in collecting tax revenue. I will not explore, albeit a worthy discussion, the addition cost of owning in jurisdictions that treat non-residents differently from locals in terms of property taxes.

If you do not treat your property as investment for rental purposes then you will not have to contend with anything other than the “substantial presence test” discussed in the last blog. If you are part of the 18% noted above who rent out their property and have not consulted with your tax practitioner, read on.

If you are writing off expenses in running the property and collecting rental income you must report both in Canada and the US.

Normally the IRS requires you to remit 30% withholding tax on gross rental income. If that seems a little steep, considering your expenses, you can avoid withholding tax by:

•    Acquiring an individual taxpayer identification number (ITIN), and•    Completing form W-8ECI and provide to tenant, and•    Annual filing of form 1040NR non-resident income tax return, which includes provision to deduct expenses associated with property rental•    Check with state jurisdiction to determine if additional filing is required

In turn, CRA requires US rental income to be reported here as well (inclusive of deductible expenses). A foreign tax credit equivalent to US taxes paid can be used to eliminate or reduce Canadian income tax payable.

As always, check with your tax practitioner for the latest applicable rules in order to avoid nasty surprises.

Next we’ll explore capital gains and estate tax.

 - Cam