Tax Reporting in the U.S.

While Canadian snowbirds are tax residents of Canada, they must report U.S. rental income to the Internal Revenue Service (“IRS”) if they rent their property out for 15 days or more per tax year. It should be reported on IRS Form 1040NR.

Unless you make a special election by filing IRS Form W-8ECI with your Form 1040NR, the IRS will levy withholding tax on your U.S. rental income. The withholding tax is 30% of the gross rental income.

Also, certain U.S. states require you to pay state-level tax on your rental income - you may be subject to both state and county and/or city level tax on your rental income.

It is always best to consult with tax professionals familiar with local law to ensure that you abide by all relevant legislation for your vacation rental.

Tax Reporting in Canada

U.S. source income must also be reported in Canada to the CRA. You will receive foreign tax credits from the CRA for the federal and state income tax that you pay in the United States. These foreign tax credits offset the tax owing in Canada, and if you receive sufficient foreign tax credits, you may be able to completely avoid double taxation.

Failing to report your rental income in both Canada and the U.S. can result in fines and hefty interest charges being added to any income tax that you should have previously paid.

You can learn more about taxes for Canadians when renting out your U.S. vacation home here.

Canadians who sell U.S. real estate will generally have to pay tax in the United States when they sell their property.

You may also be subject to a withholding tax of up to 15% of the sale price, unless you are able to secure an exemption well in advance of the sale.

You’ll also need to report the sale and pay tax on any net gain in Canada. However, this amount can usually be reduced by claiming a tax credit under the U.S. Canada Income Tax Treaty.

It is always advisable to seek the advice of cross border tax professionals on both sides of the border well in advance of any sale of U.S. real estate to plan appropriately and minimize your tax bill.

You can learn more about tax implications for Canadians who own U.S. real estate here.

When it comes to renting vs. buying a vacation property for snowbirds, the rule of thumb is if you spend 4 months or more in the same destination year after year, you’re usually better off financially if you buy, because the carrying costs of owning will be less than renting for 4 to 6 months.

Of course, if you’re looking to buy you’ll either have to have the necessary capital or the means to finance a purchase. Some snowbirds use a line of credit or mortgage on their Canadian home to finance a winter home - or you can finance through a Canadian bank that operates in the U.S.

Ultimately, whether it makes financial sense for you to rent or buy comes down to several factors, including:

• Do you plan on spending your winters in the same place for several years?
• How much time do you plan on spending in your winter destination each year?
• Do you have the means to purchase a property outright or finance the purchase?

Many snowbirds rent out their U.S. vacation properties for part of the year, as it can be a great way to help cover costs or bring in a little extra income.

However, there are some matters you need to consider and deal with ahead of time to avoid running into unexpected problems down the road:

1. Taxes: Any rental income you earn from your U.S. vacation property may be subject to both U.S. and Canadian income tax, so make sure you get advice from a cross border tax expert on the potential implications before you rent out your property.
2. Rules: Condo’s and planned communities have homeowner associations with rules that govern your ability to rent out your property. Make sure you know the rules that apply to your property. Things to look out for include minimum rental period requirements, how many times you can rent out your property during the year, whether you need approval to rent out your property, pet and children restrictions and minimum age requirements for renters.
3. Rental Agreements: Always enter into a written rental agreement with your tenants so the rental terms and obligations are clear. Use an agreement vetted by a real estate professional or lawyer to ensure you comply with local laws and have the necessary language and clauses to protect yourself if an issue arises.
4. Payment: Whenever possible, be sure to get paid in advance and ask for a security deposit.
5. Insurance: Notify your insurer that you will be renting out your property and make sure you (and your renter) have adequate coverage while your property is rented out, especially liability coverage.
6. Property Management: You will need a property manager or caretaker to handle any issues your renters may have with the property and inspect it after they vacate.
7. Personal Possessions: Remove or lock away any personal possessions, empty your fridge and food cupboard

Get more tax and legal tips Canadians renting out their U.S. vacation properties.

Canadians snowbirds have a number of financing options available when buying U.S. property.

U.S. mortgages can be a good option for snowbirds, but be aware that many U.S. lenders won’t offer mortgages to “foreign nationals” (including Canadians) and those who do may charge you a hefty premium.

If you’re looking for a U.S. mortgage, you should check first with Canadian banks that have operations in the U.S., as some of them offer U.S. mortgages for Canadians that use your Canadian credit history to evaluate your mortgage application and won’t charge you a premium for being a foreign national.

If you own property in Canada, you should also explore getting a mortgage in Canada or Home Equity Line of Credit (HELOC) on your Canadian property and using the proceeds to purchase your U.S. property.

There are pros and cons to each option, and the right option for you will depend on you your personal situation and the general economic environment.

Your best bet is to explore all options so you can compare each of them.

For more information on this topic, you may want to check out our top mortgage tips for Canadians buying U.S. property and snowbird vacation home financing options.

While LLCs (Limited Liability Companies) may be a good structure for Americans to own real estate, they are often NOT the best structure for Canadians to own U.S. real estate. Unfortunately, a number of Canadians have been incorrectly advised that LLCs are their best option by individuals who don’t understand the tax and estate planning issues on both sides of the border.

The best ownership structure for Canadians to own U.S. property really depends on your personal situation. Before you choose an ownership structure, we always suggest you consult with a legal advisor who specializes in cross border real estate transactions so they can help you decide on the right structure to meet your needs.

You can learn more about U.S. real estate ownership structures for Canadians here