Holding Canadian Real Estate: A Tax Guide for U.S. Citizen and Non-Residents

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Have you have been following our series of tax guides for U.S Citizens and non-resident Canadians? Then you may already know how complicated things can get when it comes to selling real estate as a non-resident. But there are matters that you should be aware of even if you’re not selling but holding real estate in that country.

Let’s begin:

Withholding Taxes

A 25% non-resident withholding tax Canada is also due on the gross rents you receive from the property. So make sure you remit this tax to the CRA 15 days after you receive the rent.

Annual CRA Filings

You can file Section 216 Return each year if you think you’ll get a refund. In a form on section 216 non-resident rental return, you will report your net rental income from Canadian rental properties you own. Sure, your Canadian residents pay rent at a graduated rate. However, the previously remitted 25% tax will reduce the amount you owe to the CRA. Then, they will refund the excess withholding tax.

Selling a Canadian rental property or Canadian real estate in the future? Here is a tax guide for non-residents to avoid any surprises.  

Gross and Net Rents

The NR4 Return you file each year identifies the amount you remit to the CRA as withholding tax. But that’s for gross rent. If you want them to deduct from the net rental amount, you must file the form NR6. Calculate both the expected gross and net income for your property along with the expenses. Include it with the NR6 Form, file, and wait for CRA’s approval. Remember if you are not a resident of Canada, you must file a Section 216 Return by June 30 if you choose the latter alternative.

Foreign and Canadian Real Estate Depreciation in the U.S.

The IRS has different tax rules for depreciating foreign rental properties, such as those that are owned by U.S. Citizens and non-residents of Canada. Unlike with the U.S. properties, here, the IRS will use an Alternative Depreciating System (ADS) on a 30 year for residential and 40-year for commercial. This is different from the U.S. properties since they have a 27.5 year for residential and 39-year schedule for commercial.

The Benefits of Depreciation

Depreciation is a reduction of the gross income when you rent out a property due to wear and tear. Alternate name of Depreciation in Canada is Capital Cost Allowance (CCA). The depreciation is related to structures and not the land you own.

Depreciation is a temporary benefit and when you sell the property, the IRS will subtract the accumulated depreciation. So, you will pay an additional tax – there are exceptions.

How to Calculate Foreign Property Depreciation in 5 Steps

  1. First you need to calculate depreciation basis. Basis is FMV or purchase price on date of placing in service minus the land. For example, foreign property FMV or purchase on date of service is $800,000 and $250,000 is related to land. 

Formula: Depreciation Basis = Purchase Price or FMV of Total Property – Land Cost

 

Depreciation Basis= $550,000 ($800,000 – $250,000)

  1. Next you’ll need to figure out the number of years it will take for the property to depreciate. Foreign residential property is depreciated over 30 years and Foreign commercial property is depreciated over 40 years using Alternative Depreciating System (ADS).
  2. To determine the depreciation amount, divide the depreciation basis by the number of years.

Formula: Depreciation Amount = Depreciation basis / Number of years

Depreciation amount = $18,333* ($550,000 / 30 years)

*The first and last year depreciation amount will be different due to timing of the placement of the property in service as there might not be full twelve months.

Thus, on a foreign property worth $800,000, $250,000 is related to land. It means the property owner can depreciate it $18,333 for 30 years or $13,750 for 40 years. Say, you own real estate that brings you $20,000 per year but costs $10000 in expenses and property tax. With a depreciation of $18,333 or $13,750, your income becomes zero thus resulting in zero tax.

AKIF CPA can craft a tailored tax solution for you any day. So, if you’re in tax trouble because you weren’t aware that you had to report foreign rental income, call us. Or, if your filing ended up below the threshold for it in a foreign country, get in touch. We also assist clients regarding any other unreported income, assets, accounts, and investments they might have. So, contact us before the IRS contacts you!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.

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