Canadian owners of U.S. rental properties electing to choose the ‘net rental income’ method for reporting their U.S. property income, must file form 1040NR along with related schedules which includes Schedule E – Supplemental Income and Loss from rental properties, along with Form 4562 – Depreciation and Amortization. The filing deadline is June 15th of the year following the end of the tax year.
Separate 1040NRs must be filed for each Canadian co-owner, and the filings must either have an ITIN, or have attached to them, the properly prepared Form W-7 ITIN application. The IRS cannot process Form 1040NR without an ITIN or W-7 application. Form 1040NR is manually submitted to the IRS for processing. Our firm submits all filings via courier, which enables our clients to verify tracking and receipt.
It is important that the initial 1040NR tax filings for a new property must be accompanied by a cover letter which details the choice to elect to report as ‘effectively connected income’ with a business or trade in the U.S. If the election is not made, there is a chance that the IRS will require 30% withholding on gross rents received. Under U.S. domestic tax law, a non-resident – whether an individual or corporation – is subject to U.S. individual graduated federal tax rates if they have income that is “effectively connected with the conduct of a trade or business within the United States”. Effectively Connected Income (ECI) is generally U.S.-source business income attributable to a U.S.-based activity that rises to the level of a trade or business. ECI includes situations where Canadian individuals own and operate property rentals in the U.S. Also, capital gains or losses earned on the disposition of U.S. real property, including shares of a U.S. real property holding company, are considered effectively connected to the U.S., even if you are not considered to be engaged in a U.S. trade or business (e.g. sale of personal use real property located in the U.S. by an individual).
We hope you have found this quick recap on Form 1040NR filings useful. U.S. and Canadian income tax can be very complex. Please contact our firm to discuss how Edelkoort | Smethurst | Schein CPAs LLP can assist you with your U.S. and Canadian individual tax planning and filings. We look forward to hearing from you. Thanks for taking the time to read this article, and best wishes.
This blog was written by Derek Edelkoort CPA, CGA, Partner