Do I need to file a U.S. Income Tax Return?

Canadian individuals renting their U.S. vacation property are considered non-residents for U.S. tax purposes and are required to file Form 1040NR U.S. Nonresident Income Tax Return annually to report the rental activity of their vacation property. The annual filing deadline of Form 1040NR U.S. Nonresident Income Tax Return for individuals reporting rental activity of their U.S. vacation property would be June 15th; an extension of time to file may also be available. Further, Canadian individuals owning a U.S. vacation property strictly for personal-use have no requirement to file Form 1040NR U.S. Nonresident Income Tax Return as the property will not derive any income.

In order to file a Form 1040NR U.S. Nonresident Income Tax Return as a non-U.S. person, you must obtain a U.S. Individual Tax Identification Number (ITIN). To obtain an ITIN, Form W-7 Application for IRS Individual Tax Identification Number (ITIN) must be completed and submitted along with supporting documentation to establish your identity and connection with a foreign country. The most common piece of supporting documentation provided to the IRS is a certified copy of your Canadian passport.

The information required to prepare and file Form 1040NR U.S. Nonresident Income Tax Return includes:

  • Number of days you were present in the United States for the three preceding taxation years (e.g. 2014, 2015 and 2016)
  • Property information (physical address, number of days rented, number of days available for rental and number of days used personally)
  • Date of purchase and cost of property (legal documentation regarding purchase and any capital expenditures)
  • Rental information (revenues and expenses)

 

What happens when we eventually sell our U.S. vacation property?

Typically, the disposition of U.S. real property by a non-U.S. person is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding. There may be a requirement from the purchaser to withhold and remit 15% of the gross sales proceeds to the IRS as part of the sale. In the year of disposition, Form 1040NR U.S. Nonresident Income Tax Return must be filed, regardless of past use, to report the disposition of the property and the 15% withholding tax withheld upon the closing of the sale of the property. At this time, it will be determined whether the disposition of the property will trigger a capital gain/loss and whether the 15% FIRPTA withholding tax will be sufficient to cover the tax liability associated with the sale of the property and whether a portion (if not all) of the withholding can be refunded.

A reduced withholding rate may be applicable upon the sale of your property. Please contact an RLB U.S. Tax Advisor prior to the closing of a sale, in order to determine whether you will qualify for a reduced withholding rate.

 

Will I be subject to U.S. estate tax?

Canadian citizens and residents may be subject to U.S. estate tax based on the fair market value of the U.S. situs assets which they own at the time of their death. Under the Canada-U.S. Income Tax Treaty, Canadian residents may only have a U.S. estate tax liability if their worldwide assets exceed a value of $5.45 million (based on the 2016 estate tax exemption). Those individuals who have worldwide assets exceeding a value of $5.45 million may be required to pay U.S. estate tax based on the value of their U.S. situs assets at time of death. Fortunately, under the Canada-U.S. Income Tax Treaty a taxpayer is able to claim a “unified credit” in order to reduce, and potentially eliminate, any U.S. estate tax liability. In addition to the “unified credit” a taxpayer may be entitled to a “marital credit” if the U.S. situs assets pass to a surviving spouse upon the taxpayer’s death. The marital credit is equal to the lesser of the “unified credit” and the amount of estate tax arising upon death, typically eliminating all U.S. estate tax upon the first spouse’s death.

Although no U.S. estate tax may be due, it may be required for a U.S. estate tax return, Form 706-NA, to be filed claiming benefits under the Canada-U.S. Income Tax Treaty as U.S. lawyers or transfer agents may not transfer ownership of U.S. property to a non-U.S. person without clearance from the IRS. The deadline to file a U.S. estate tax return is nine months after the date of death of the taxpayer.

Contact our U.S. Tax Team by email at ustax@rlb.ca for more information and to determine what might be applicable to you. You can also find out more about our tax services by clicking here.