TEP Strategy: June 2013 - U.S. Estate Tax
Renting your U.S. vacation property - Be sure you know the tax implications
Like many Canadians, you may own a vacation property in the United States (U.S.). And, you may be considering renting it out for the purpose of earning income or to defray the ongoing maintenance expenses. Before you begin renting your U.S. vacation property, however, you should take into account both the U.S. and Canadian income tax consequences.
Is your property subject to U.S. income tax?
If you are a Canadian tax resident, you must pay U.S. income tax on the rent you receive from your U.S. vacation property whether you or your agent:
- arranges the rental while in the U.S. or Canada,
- receives rental payments while in the U.S. or Canada, or
- rents the property to Canadians or others.
If you are NOT a U.S. person1, you must pay U.S. income tax on the rent you receive in one of two ways:
1. withholding tax, or,
2. tax on net rental income.
If you ARE a U.S. person2, you declare the rent as income on your U.S. tax return and you may deduct your ordinary expenses and a depreciation charge from this income. You then pay tax on your net rental income according to U.S. tax rates.
Foreign tax credit helps avoid double taxation
As a Canadian resident, you pay tax on your worldwide income, including the rent you receive from your U.S. vacation property. However, you should receive a credit on your Canadian tax return for any tax you have paid in the U.S. on rental income. This is referred to as a "foreign tax credit” and by claiming the credit, you avoid double taxation on the same rental income.
Also, remember that you may need to report the cost of your U.S. vacation property and the net rental income you have received. This is required when the cost of your specified foreign property (your rented vacation property and other foreign investments) exceeds $100,000 at any time in the taxation year.
As with any tax planning, you should consult a tax advisor about your own unique circumstances.
Any discussion of U.S. tax matters in this communication (including any attachments) cannot be used for the purpose of avoiding tax penalties.
1 You are a non-resident alien for U.S. tax purposes.
2 You are a U.S. citizen or resident alien (green card holder), or have elected to file a U.S. income tax return.
If you would like more information on income tax planning, or would like a complimentary copy of our publications "U.S. Estate Taxes”, "Renting Your U.S. Vacation Property”, and "Planning the Purchase a U.S. Property”, contact your Investment Advisor.