Renting Out Your Canadian Home While Living in the US: Taxes

Do I pay US tax on Canadian rental income, and does Canada tax it too?

Yes, both. Canada taxes the rent first because the home is in Canada; the US taxes it again because you are a US resident, then gives a credit for the Canadian tax. Article VI of the Canada–US treaty lets the country where the property sits tax the rent, and Article XXIV makes the US allow a credit for income tax paid to Canada.

A case stops being simple when no Form NR6 (which lets a Canadian agent withhold on net rent) or agent is in place and nothing was sent to the CRA, when the rental shows a loss, when a sale is coming, or when co-owners live on different sides of the border.

Gather: a rent ledger by month, every expense with receipts, the home's value on the day you moved out, your original cost and improvements, NR4 slips, any section 216 assessment, your departure return and any section 45(2) letter, the NR6 approval if you have one, and past US returns showing depreciation claimed. Canada expects rental records kept for six years.

What happens for tax on the day my home becomes a rental as I leave?

Leaving Canada does not deem your Canadian home sold. Departure tax deems most property sold, but section 128.1(4)(b) excludes real property situated in Canada.

Changing the home from your residence to a rental is a separate event. When a principal residence is completely converted to income-producing use, Canada treats it as sold at fair market value that day; the principal residence exemption usually covers the gain for years it was your home. You can instead defer that deemed sale by electing under section 45(2): a signed letter filed with the return for the year the use changed, which for most movers is the departure return (Folio S1-F3-C2, ¶2.48). For the steps and a late election, see turning a home into a rental and missed or late 45(2) elections.

Does a section 45(2) election still help once I live in the US?

Less than it would for someone still in Canada. The election lets the home count as your principal residence for up to four more years, but only for years you are resident or deemed resident in Canada (Folio S1-F3-C2, ¶2.50). Once you are a US resident, those extra years do not count.

Claiming capital cost allowance on the home cancels the election from the first day of that year, and Canada then treats the home as sold at its value that day (¶2.48).

Two routes, in short. With no election, the gain up to move-out is usually covered by the exemption, later gain is measured from that day's value, and capital cost allowance is open. With the election, nothing is sold at move-out, no capital cost allowance is claimed, and only years you were resident can be designated when you later sell. Which leaves less Canadian tax depends on the values and dates. The comparison is easiest before the departure return is filed; a late or changed election has its own rules (missed or late 45(2) elections).

Which country taxes the rent first, and how does the US credit work?

Canada taxes first; the US credits the Canadian tax against US tax on the same rent. You claim the credit on Form 1116; rent is usually passive category income for the credit limit (Publication 514).

The credit can be smaller than the Canadian tax. The US limit caps it at the US tax on that foreign income, and unused amounts can carry back or forward; see foreign tax credit limits.

The foreign tax credit does not reduce the 3.8% Net Investment Income Tax, which can apply to rental income once modified adjusted gross income passes US$200,000 single or US$250,000 joint (IRS NIIT questions and answers). Your state may tax the rent too; state credit rules differ by state.

What do I file in Canada each year?

By default, 25% non-resident tax (Part XIII tax) applies to the gross rent (CRA T4061). With a Canadian agent, such as a property manager, Form NR6 lets the agent withhold on net rent instead. Without an agent, you must send the tax to the CRA yourself.

You may then file a section 216 return to pay tax on net rent rather than gross; any withholding above the tax on that return is refunded (CRA T4144). It is generally due within two years after the year ends, and by June 30 of the next year when an NR6 was approved. Miss June 30 after an NR6 and the election fails: you owe 25% of the gross rent. NR6 timing, agents, expenses and the Underused Housing Tax are in the non-resident landlord guide. If nothing was withheld, see when the tenant or agent never withheld.

What do I report on my US return, and is depreciation required?

Report the rent and expenses on Schedule E in US dollars, and depreciate the house. Depreciation is not optional in practice: your US basis drops by the depreciation allowed or allowable, whichever is greater, even in years you did not claim it (Publication 946). Already filed two or more years without it? The usual fix is not an amended return but a change in accounting method on Form 3115, which catches up the missed depreciation in the year of change (Publication 946).

• Starting basis: the lesser of your adjusted basis or the fair market value on the day it became a rental (Publication 527). Land is not depreciated.
• Method: a home used mainly outside the US must use the alternative depreciation system, over 30 years, not the 27.5 years used for a US rental (Publication 946).
• Deductions: Canadian mortgage interest, property tax, insurance, repairs and management fees go on Schedule E like any rental.

How to convert the purchase price, rent and expenses to US dollars is in property abroad.

Why do my Canadian and US rental profits differ, and which Canadian tax do I credit?

The rules and the currency differ, so the same rent produces two different profits. Canada lets you skip capital cost allowance; the US requires depreciation, from a different starting basis and over a different period. Exchange rates add more difference.

For the US credit, use the final Canadian tax, not the amount first withheld. Only the legal and actual foreign tax liability qualifies, and tax that would be refunded if you made a claim does not (Publication 514). If your section 216 return refunds part of the 25%, the credit is the tax that return assesses. If you never file that return, the part it would have refunded still does not qualify; only the tax on net rent does. If the section 216 return is filed after your US return and changes the Canadian tax, the US credit may need correcting.

Can a US rental loss offset my US wages?

Only within the passive activity limits. A rental is generally a passive activity, and passive losses usually offset only passive income. If you actively participate and own at least 10%, up to US$25,000 of loss may offset other income; that allowance phases out between US$100,000 and US$150,000 of modified adjusted gross income (Publication 925). Disallowed losses carry forward.

A US loss does not remove Canadian tax. Canada can still tax a small Canadian profit in the same year, and a section 216 loss cannot reduce other Canadian income (CRA T4144).

Does the Canadian bank account the rent goes into need US reporting?

Often yes. An FBAR is due when your foreign accounts together exceed US$10,000 at any time in the year. Form 8938 applies when foreign financial assets of a US resident exceed US$50,000 at year end or US$75,000 at any time, single, or US$100,000 and US$150,000 joint. The house itself, held directly, is not reported on either form (IRS comparison of Form 8938 and FBAR). See your first FBAR after moving from Canada.

What does renting do to a later sale?

Renting changes the sale in both countries. In the US, the home-sale exclusion of up to US$250,000 single or US$500,000 joint needs ownership and use as your home for 24 months in the 5 years before the sale (Publication 523). If you rent it for more than three years after moving out, you generally can no longer meet that test; selling your Canadian home after moving to the US covers the exceptions. Even inside the window, gain from depreciation is not excluded and can be taxed at up to 25%.

In Canada, a non-resident seller needs a section 116 certificate, and any capital cost allowance claimed comes back as recapture. See selling your Canadian home after moving to the US.

Example

Figures are illustrative, in Canadian dollars (C$) and US dollars (US$) as marked, at assumed exchange rates.

Calgary house with a property manager

Rent is C$3,000 a month, C$36,000 a year. A property manager holds an approved NR6 and withholds on net rent through the year. Net rent after expenses is C$12,000; the section 216 return assesses Canadian tax on that C$12,000. On the US side, rent of about US$26,000 goes on Schedule E with depreciation over 30 years from the lower of cost or value at move-out. Say that return assesses C$2,500, about US$1,800 at the same assumed rate: that is the foreign tax on Form 1116, subject to the credit limit.

Vancouver condo with no agent

The owner has no Canadian agent, so each month the owner sends 25% of gross rent to the CRA: C$750 on C$3,000 rent, C$9,000 for the year. The section 216 return shows tax of C$4,000 on net rent, and the CRA refunds C$5,000. The foreign tax for the US credit is the C$4,000 converted to US dollars, not the C$9,000 first sent, and the credit limit still applies.

US loss, Canadian profit

• Canada: no capital cost allowance claimed, net rent C$2,000, Canadian tax still due on the section 216 return.
• US: depreciation turns the same year into a US$3,000 loss. With wages above the phase-out range, the loss cannot offset wages and carries forward as a passive loss. The Canadian tax still counts toward the credit, subject to the limit.

Different for you?

• No NR6, no agent, and nothing sent to the CRA: see when the tenant or agent never withheld and get cross-border tax help before the years pile up.
• You have not yet filed the departure return, or are deciding on the 45(2) election: start with turning a home into a rental and moving from Canada to the US; the choice is hard to undo, so cross-border tax help fits here.
• The rental shows losses, or the two returns never reconcile: this is where cross-border tax help fits.
• You rented for years without US depreciation: the catch-up runs through Form 3115; cross-border tax help fits here.
• You plan to sell: read selling your Canadian home after moving to the US before you list.
• A co-owner still lives in Canada: each owner reports their own share under different rules; see co-owned rental property reporting and get cross-border tax help.
• You missed FBAR or Form 8938 for the rent account: see missed FBAR or TFSA forms.