Cross-Border Rental Income: US and Canada Tax Rules

Owning rental property across the Canada-US border creates a tax obligation in the country where the property sits, a reporting obligation in the country where you live, and a foreign tax credit mechanism that prevents double taxation, provided you make the right elections and file the right forms. Without those elections, both countries default to gross-income withholding at high flat rates (25% in Canada, 30% in the US), with no deduction for expenses. The elections to be taxed on net rental income (after expenses) are available in both directions, but they must be affirmatively claimed.

How is a Canadian’s US rental income taxed?

A non-resident alien (including a Canadian resident without US citizenship) who earns rental income from US real property is subject to a 30% withholding tax on gross rental income under IRC 871(a). The tenant or property manager withholds 30% of each rent payment and remits it to the IRS.

The 30% rate applies to gross rents, with no deduction for any expenses. On a property that generates $2,000/month in rent with $1,500/month in expenses, the effective tax rate on net income would be over 100% if the gross withholding applies. This is almost never the right outcome.

The IRC 871(d) election. A non-resident alien can elect under IRC 871(d) to treat US real property income as effectively connected with a US trade or business. The election allows the taxpayer to file a US return (Form 1040-NR) and report net rental income, deducting all ordinary and necessary expenses: mortgage interest, property taxes, insurance, repairs, management fees, and depreciation. The net income is then taxed at graduated US rates, which for most rental properties produces significantly less tax than the 30% gross withholding.

• Form W-8ECI. Once the election is made, the taxpayer provides Form W-8ECI to the property manager or tenant, which stops the 30% withholding. The taxpayer then reports on Form 1040-NR and pays tax on the net amount.
• ITIN required. The Canadian needs an Individual Taxpayer Identification Number to file the 1040-NR. Apply on Form W-7.
• State tax. Most US states also tax non-resident rental income. State withholding and filing requirements vary by state. Florida has no state income tax; New York, California, and Arizona (common vacation property states) do.

For details on the 871(d) election mechanics, see the US rental income for non-residents guide.

How is a US person’s Canadian rental income taxed?

A non-resident of Canada who earns rental income from Canadian real property is subject to 25% withholding on gross rents under Part XIII of the Income Tax Act. The tenant or property manager withholds 25% of each payment and remits it to the CRA.

As with the US default, the 25% gross withholding ignores all expenses. The net-income alternative is available but requires two steps: an NR6 filing for reduced withholding, and a Section 216 return.

Step 1: NR6 for reduced withholding. The non-resident files Form NR6 with the CRA before the first rental payment of the year (or within the year, though late filing means gross withholding applies until approval). The NR6 provides an estimate of rental income and expenses, and if approved, the CRA allows the property manager to withhold 25% of estimated net income rather than 25% of gross rents. This reduces the monthly cash drain from withholding by the expense ratio of the property.

Step 2: Section 216 return. By June 30 of the following year (not April 30), the non-resident files a Section 216 return, which is a Canadian T1 return that reports only the Canadian rental income. The return claims all deductible expenses (mortgage interest, property tax, insurance, repairs, CCA/depreciation, management fees) and calculates the actual Canadian tax on net rental income at graduated rates. If the Section 216 tax is less than the amount withheld under the NR6, the excess is refunded.

• Late-filing trap. If the Section 216 return is not filed by June 30 of the following year, the non-resident loses the ability to deduct expenses and owes the 25% gross withholding as the final tax. This deadline is strict.
• CCA (depreciation). Canada allows Capital Cost Allowance on the building (not the land) at the prescribed rate (typically 4% declining balance for residential property). Claiming CCA reduces net income and Canadian tax but may create a recapture problem on sale.

For the full NR6 and Section 216 mechanics, see the Canadian rental income after moving to the US guide.

How does the FTC coordination work?

The foreign tax credit mechanism prevents double taxation on cross-border rental income. The country where the property sits has the primary taxing right (under Article VI of the Canada-US tax treaty, income from real property is taxable in the country where the property is located), and the home country gives a credit for the tax paid to the source country.

Canadian owning US rental property:

• US taxes the net rental income on Form 1040-NR (after the 871(d) election)
• Canada includes the same rental income in worldwide income on the T1 return
• Canada allows a foreign tax credit under ITA 126(1) for the US tax paid
• If the US effective rate on the rental income exceeds the Canadian rate, the excess US tax is not creditable (the credit is limited to the Canadian tax on that income)

US person owning Canadian rental property:

• Canada taxes the net rental income on the Section 216 return
• The US includes the same rental income on Schedule E of the 1040
• The US allows a foreign tax credit on Form 1116 for the Canadian tax paid
• The FTC is subject to the IRC 904 limitation, applied separately by category (rental income is generally passive category)
• If the Canadian effective rate exceeds the US rate, excess FTC credits carry forward up to 10 years under IRC 904(c)

What expenses can I deduct?

Both countries allow similar expense deductions for net-income rental reporting:

• Mortgage interest on the loan used to acquire the property (not a home equity line used for other purposes)
• Property taxes assessed by the local taxing authority
• Insurance premiums for the rental property
• Repairs and maintenance (not capital improvements, which are added to the cost basis and depreciated)
• Management fees paid to a property manager
• Advertising costs to find tenants
• Utilities paid by the landlord
• Travel to the property for management purposes (with documentation)
• Depreciation/CCA. The US allows depreciation over 27.5 years for residential rental property (straight-line). Canada allows CCA at 4% declining balance (Class 1 for most residential buildings). The two systems produce different annual deductions, which affects the net income calculation on each return.

The expense deductions on the source-country return reduce the tax in that country, which in turn reduces the FTC available in the home country. The home country calculates its own net rental income using its own rules, which may differ from the source country’s calculation (different depreciation methods, different rules on which expenses are deductible).

What happens when I sell the property?

The sale of cross-border rental property triggers capital gains tax in the source country and reporting in the home country.

Selling US property as a Canadian resident:

• FIRPTA (the Foreign Investment in Real Property Tax Act) requires the buyer to withhold 15% of the gross sale price and remit it to the IRS. The withholding rate drops to 10% if the sale price is $1,000,000 or less and the buyer intends to use the property as a residence, and is zero if the sale price is $300,000 or less and the buyer intends to use it as a residence.
• The Canadian files a US return (Form 1040-NR) reporting the capital gain. The gain is the sale price minus the adjusted basis (original cost plus capital improvements minus accumulated depreciation).
• Depreciation recapture under IRC 1250 is taxed at 25% to the extent of depreciation claimed.
• The remaining long-term capital gain is taxed at 0%, 15%, or 20% depending on total US income.
• Canada includes the same gain in worldwide income. The 50% capital gains inclusion rate applies. The FTC for US tax on the gain offsets the Canadian tax.

Selling Canadian property as a US resident:

• The non-resident must obtain a Section 116 clearance certificate from the CRA before the sale closes (or within 10 days of closing). Without the certificate, the buyer must withhold 25% of the gross sale price.
• The non-resident files a Canadian return reporting the capital gain. The 50% inclusion rate applies in Canada.
• CCA recapture is included in income to the extent of CCA previously claimed.
• The US includes the same gain on Schedule D of the 1040. The gain is calculated using US basis rules (which may differ from the Canadian ACB due to different depreciation methods and currency conversion).
• The FTC on Form 1116 credits the Canadian tax against the US tax on the same gain.

How does currency conversion affect the numbers?

Currency conversion creates a persistent nuisance in cross-border rental reporting. The source-country return is filed in the source country’s currency (USD for US property, CAD for Canadian property), but the home-country return must convert every transaction to the home currency.

• Rental income. Each month’s rent is converted at the exchange rate on the date received (or, for practical purposes, the average monthly rate or annual average rate if the amounts are consistent).
• Expenses. Each expense payment is converted at the rate on the date paid.
• FTC. The foreign tax paid is converted to the home currency at the rate on the date paid (or the annual average if consistent).
• Capital gain on sale. The gain is recalculated in the home currency, which can produce a different amount than the source-country gain because the exchange rate at purchase differs from the rate at sale. A property that appreciated 20% in local currency may show a 30% gain in the home currency if the foreign currency also appreciated, or a 10% gain if it depreciated.

The currency conversion difference is real taxable income (or loss). It is not an error in the calculation; it reflects the actual economic gain in the home currency.

What are the common mistakes?

The most frequent cross-border rental mistakes:

• Not making the net-income election. Leaving the gross withholding in place (30% US or 25% Canada) when expenses exceed 50% of gross rent, which they usually do, means paying more tax than the net income warrants. The election is available and almost always beneficial.
• Missing the Section 216 deadline. June 30 is strict. Missing it forfeits the right to deduct expenses for that year.
• Not filing an NR6. Without the NR6, the property manager withholds 25% of gross rents monthly, creating a cash flow problem even if the Section 216 return eventually produces a refund.
• Forgetting depreciation recapture. Claiming depreciation (US) or CCA (Canada) reduces annual tax but creates recapture on sale. The recapture can be a surprise if not planned for.
• Mismatched basis. Using the source-country basis on the home-country return, without adjusting for currency conversion and different depreciation methods, produces an incorrect gain or loss.
• FBAR and Form 8938. A US person who holds a Canadian bank account for collecting rent must report it on the FBAR and possibly Form 8938. The rental property itself is not a financial account, but the bank account holding the rent deposits is.

What should I do next?

Cross-border rental income is manageable when the right elections are in place and both returns are coordinated. The key is making the net-income election before the first rental payment, filing both returns with consistent income and expense reporting, and claiming the FTC to prevent double taxation.

• US rental income for non-residents: 30% or Section 871(d)?, the US net-income election
• Canadian rental income after moving to the US: NR6 and Section 216, the Canadian net-income election
• Section 116 certificate for selling Canadian property, the clearance certificate on sale
• Form 1116 and the foreign tax credit, the FTC mechanics
• FTC carryforward and carryback, when credits exceed the current-year limit
• The US-Canada tax treaty explained, Article VI on real property income

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.