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.

As of early January 2020, the Canadian Snowbirds Act, which would effectively amend U.S. tax law to allow Canadians who meet certain criteria to spend 8 months in the U.S. per calendar year (instead of the current 6 month limit) has only been proposed as a bill and has not been passed into law.

We are following the status of this bill closely and will advise Snowbird Advisor members of any important developments.

In the meantime, you can learn more about the proposed Canadian Snowbirds Act here.

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.

The filing deadline for IRS Form 8840 - also known as the Closer Connection Exemption - is June 15 for the previous calendar year. The form must be filed annually.

Canadian snowbirds who qualify for the exemption and file Form 8840 by the June 15th deadline can stay in the U.S. for up to 182 days without being considered a U.S. resident for tax purposes.

You can learn more about the Closer Connection Exemption requirements here and download a fillable version of Form 8840 here.

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

You are correct, there are two different sets of rules – one for tax purposes and one for immigration purposes.

A common misconception among Canadian snowbirds is that there is only one set of rules to comply with. This misconception can lead to the misapplication of the rules, resulting in a variety of negative consequences.

Tax rules deal with how long you can stay in the U.S. before you are considered a U.S. resident for tax purposes. Violating these rules by spending too much time in the U.S. or failing to file the required forms with the IRS can lead to serious adverse tax and financial consequences. You can learn more about U.S. tax rules for Canadian snowbirds here.

Immigration rules, on the other hand, dictate how much time you can spend in the U.S. in general. Spending too much time in the United States can lead to a number of adverse consequences when trying to enter the U.S., including increased scrutiny when crossing the border, being denied entry to the U.S. on a one-time basis or even being banned from entering the U.S. You can learn more about U.S. immigration rules for Canadian snowbirds here.

It’s essential for Canadians who spend time in the U.S. to comply with both sets of rules to avoid running into issues south of the border.