With much of Canada suffering from freezing cold temperatures in the past few days, and winter fast approaching, the thoughts of vacationing somewhere warm may be tempting you to snap up that Florida or Arizona property you have been tempted to buy for so many years.
But before you dive into the U.S. real estate market, keep in mind that just because your vacation property may be located beyond Canada’s borders, it doesn’t mean that it’s outside the reach of the tax authorities. If you’re Canadian, there are a few situations that could trigger a tax bill in conjunction with your U.S. property.
Renting it
If you’re like many vacation property owners, you may be inclined to rent out your property when you are not occupying it. If you do so, you should consider filing a U.S. tax election to have the rental income treated as income from a U.S. business and thus avoid a 30% U.S. withholding tax that would otherwise be taken off your gross rental income before you receive your cash. By electing, you can instead report only your net rental income, after applicable expenses, on an annual U.S. income tax return and have the income taxed at graduated U.S. tax rates. Although net rental income from your U.S. property is also taxable in Canada, the good news is you won’t pay tax twice since you can generally claim a foreign tax credit on your Canadian tax return for the U.S. income taxes paid.
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