Working Tax Credit Rates
May 29th, 2011
Question: How does the Canadian Foreign Tax Credit work on a US property rental? Accountants?
Specifically:
I am a Canadian and own a property in the US and earn rental income on it. I understand the flat tax rate in the US in this scenario is 30% but how is the Canadian Credit calculated?
Is the amount of tax paid in the US deducted from Canadian income or is the income altogether considered tax exempt?
IE.
30k rental income with 9k (30%) paid in US tax.
In Canada am I getting a deduction of 9k (claiming 21k income)
Or is that 30k considered exempt?Thanks for the help!
Answer: There is no “flat tax rate”. There is a withholding of 30% on gross rental income.
You are required to file a US tax return, Form 1040NR, showing the rental income on line 18 and calculating the actual tax due after deductions. You then apply the amount withheld to the balance due on the return, and usually get a refund.
http://www.irs.gov/pub/irs-pdf/p519.pdf
http://www.irs.gov/pub/irs-pdf/f1040nr.pdf
http://www.irs.gov/pub/irs-pdf/i1040nr.pdf
You then declare the rental income and deductions on your Canadian return. You declare the ACTUAL amount of US tax paid as shown on your US return (not the withholding) as a Foreign Tax Credit on your Canadian return and receive that amount as a credit on your Canadian tax balance, subject to certain limitations (i.e. you cannot deduct more foreign tax than the actual amount of Canadian tax applicable to the foreign income). This is calculated on Form T2209, Federal Foreign Tax Credits.
http://www.cra-arc.gc.ca/E/pub/tp/it270r3/README.html
http://www.cra-arc.gc.ca/E/pbg/tf/t2209/README.html
As well you should know that taking depreciation on Rental Property in the US is MANDATORY. The amount of depreciation will reduce the basis of the property, and consequently increase the gain upon its sale. Upon the sale of the property, 10% of the sales price will be withheld to make sure that you go through the same exercise and pay capital gains tax in the US.
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