Hi, I'm a Canadian citizen and I've been living & working in the US for 3 years now. I bought a rental property in Canada and I was wondering if I could report the income & expenses on schedule E just as if the property was in the US?
I'm currently expensing the mortgage interest as part of the rental expenses (schedule E), but could I also benefit from it elsewhere, even though it's not my primary residence?
Finally, should I be depreciating the property on my CDN & US returns? Is it an option or a requirements? I understand the immediate tax consequences, but what about long term effects in case I sell the property?
Canadian Rental Property
Moderator: Mark T Serbinski CA CPA
You MUSt report the income and expenses in US as well as file a 216 return in canada. I trust you are having the rent tax withheld every month?
Your mortgage expenses can only be deducted as rental expenses, as this does not qualify as your first or second 'home'.
On US return you MUST depreciate -- you have no choice. In canada it is an option. I would look at how my foreign tax credits are looking in order to determine whther I should pay more or less cdn tax.
The long term tax consequences will be a higher US tax IF you sell when still in US. If you sell after leaving US, you will actually catch a break.
Gut feeling would be to NOT depreciate in Canada.
<i>nelsona non grata</i>
Your mortgage expenses can only be deducted as rental expenses, as this does not qualify as your first or second 'home'.
On US return you MUST depreciate -- you have no choice. In canada it is an option. I would look at how my foreign tax credits are looking in order to determine whther I should pay more or less cdn tax.
The long term tax consequences will be a higher US tax IF you sell when still in US. If you sell after leaving US, you will actually catch a break.
Gut feeling would be to NOT depreciate in Canada.
<i>nelsona non grata</i>
Thanks for the quick reply.
I read somewhere that rental income is considered a passive activity. Is this true? Does that mean that I cannot use the net loss to offset my US income?
Finally, I bought the property in November 2003, but I did not know about the depreciation requirement in the US and therefore did not report it. I'm wondering if I can add the depreciation from 2003 to 2004. And if I already have a net loss, and this is considered a passive activity, would this help at all in offsetting my US income? Is it worth revisiting 2003?
I read somewhere that rental income is considered a passive activity. Is this true? Does that mean that I cannot use the net loss to offset my US income?
Finally, I bought the property in November 2003, but I did not know about the depreciation requirement in the US and therefore did not report it. I'm wondering if I can add the depreciation from 2003 to 2004. And if I already have a net loss, and this is considered a passive activity, would this help at all in offsetting my US income? Is it worth revisiting 2003?
As to writing off rental losses in US against other income, I would simply consult irs.gov, it should be a straightforward answer.
Your 2003 depreciation is to be reported on your 2003 return, nowhere else. Simply amend that return.
Just a tip. If the result of depreciation is that you are creating a loss in US, you won't get much out of the Cdn tax as a foreign tax credit on a 1116 -- $0 in fact. Consider simply using the Cdn tax as a foreign tax deduction on Schedule A: there is no requirement that there be actual net foreign income for this to be a deduction.
<i>nelsona non grata</i>
Your 2003 depreciation is to be reported on your 2003 return, nowhere else. Simply amend that return.
Just a tip. If the result of depreciation is that you are creating a loss in US, you won't get much out of the Cdn tax as a foreign tax credit on a 1116 -- $0 in fact. Consider simply using the Cdn tax as a foreign tax deduction on Schedule A: there is no requirement that there be actual net foreign income for this to be a deduction.
<i>nelsona non grata</i>
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charlesrei
- Posts: 6
- Joined: Mon Jan 31, 2005 8:32 am
<font face="Trebuchet MS">My wife will be investing in Canadian Rentals with her brothers. She is U.S. Resident / Citizen & a Canadian Citizen. Her brothers are Canadian Residents/Citizens. I have read the rules about the 25% withholding for rent to paid non Canadian resident, etc. I am trying to understand how it would work in this situation. Her Canadian brothers would have a controlling interest (2/3rds ownership to her 1/3rd) and were planning to buy the properties using a Numbered Company. What type of withholdings would we be subject to? Just those out of the numbered company?, etc.? Any advice appreciated. </font id="Trebuchet MS">
As the #'d company would actually own the rental property, and it is a Canadian tax resident, there would be no withholdings related to the rental income. Withholdings would only be due on payments of interest or dividends to your wife as a non-resident shareholder at the usual Treaty rates (10% and 15% respectively).
Some other things to consider before your wife proceeds.
First, under US rules, she will likely have to file Form 5471 to report her ownership in a foreign corporation with passive income. Off the top of my head, she would be subject to the PFIC rules. It would therefore be important to have her receive her share of any annual net income (if any), on a current basis.
Generally, when a property is sold by the corporation in the future and a capital gain is realized, the non-taxable portion of the gain can be paid out to Canadian resident shareholders as a tax-free "capital dividend". This is part of the tax integration design in the Canadian Income Tax Act which effectively allows a capital gain in a corporation to be taxed at the same rate as if it was realized by an individual. Your wife as a US resident would **not** receive the dividend tax free because the US does not recognize the concept of a capital dividend. So, she would in effect pay a higher rate of tax than if she owned the properties personally.
Having said all that, one better avenue for your sister and her brothers might be to have the #'d company be a Nova Scotia Unlimited Liability Company. This is taxed like any regular Canadian corporation, but has special advantages to US resident shareholders. Have them ask their lawyer about it.
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Regards,
Carson Hirner
Some other things to consider before your wife proceeds.
First, under US rules, she will likely have to file Form 5471 to report her ownership in a foreign corporation with passive income. Off the top of my head, she would be subject to the PFIC rules. It would therefore be important to have her receive her share of any annual net income (if any), on a current basis.
Generally, when a property is sold by the corporation in the future and a capital gain is realized, the non-taxable portion of the gain can be paid out to Canadian resident shareholders as a tax-free "capital dividend". This is part of the tax integration design in the Canadian Income Tax Act which effectively allows a capital gain in a corporation to be taxed at the same rate as if it was realized by an individual. Your wife as a US resident would **not** receive the dividend tax free because the US does not recognize the concept of a capital dividend. So, she would in effect pay a higher rate of tax than if she owned the properties personally.
Having said all that, one better avenue for your sister and her brothers might be to have the #'d company be a Nova Scotia Unlimited Liability Company. This is taxed like any regular Canadian corporation, but has special advantages to US resident shareholders. Have them ask their lawyer about it.
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Regards,
Carson Hirner
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charlesrei
- Posts: 6
- Joined: Mon Jan 31, 2005 8:32 am
<font face="Trebuchet MS">Thanks for the info on the NSULC. There is now a possibility that not all brothers would be engaged in each property. Would this scenario make sense: setup a NSULC that my wife owns 100% of. When properties are purchased, they can be bought by her NSULC directly (if just she is buying them), or by a numbered company, of which my wife would own the appropriate percentage?
For example, a numbered company buys a property. the numbered company is owned 33% by my wife's NSULC, 33% by brother 1 and 33% by brother 2. For example 2, my wife's NSULC buys a property outright. etc.
Is this solution invalidated if we ever moved to Canada [back in her case]?
Any tips / advice are appreciated. Tx</font id="Trebuchet MS">
For example, a numbered company buys a property. the numbered company is owned 33% by my wife's NSULC, 33% by brother 1 and 33% by brother 2. For example 2, my wife's NSULC buys a property outright. etc.
Is this solution invalidated if we ever moved to Canada [back in her case]?
Any tips / advice are appreciated. Tx</font id="Trebuchet MS">
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by charlesrei</i>
<font face="Trebuchet MS">Thanks for the info on the NSULC. There is now a possibility that not all brothers would be engaged in each property. Would this scenario make sense: setup a NSULC that my wife owns 100% of. When properties are purchased, they can be bought by her NSULC directly (if just she is buying them), or by a numbered company, of which my wife would own the appropriate percentage?
For example, a numbered company buys a property. the numbered company is owned 33% by my wife's NSULC, 33% by brother 1 and 33% by brother 2. For example 2, my wife's NSULC buys a property outright. etc.
Is this solution invalidated if we ever moved to Canada [back in her case]?
Any tips / advice are appreciated. Tx</font id="Trebuchet MS">
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
My comments are without doing a complete analysis, but from memory, the NSULC would need to hold your wife's share of the properties **directly**, ie. NOT through another Canadian holding company. Purchases could always be made as tenants in commmon with the NSULC being part owner on one hand and the holding corporation being the other owner.
If the NSULC was instead a shareholder of the Holdco, then your wife would have the same issues as if she owned the Holdco shares directly.
The idea is that the NSULC is a disregarded entity (ie. a pass-through) for US tax purposes, allowing any net rental or capital gains to be taxed to your wife personally on her 1040 return. A foreign tax credit is allowed for the Canadian corporate tax paid by the NSULC.
This should continue to work if you move back to Canada.
Note, the IRS has produced a new two page form, Form 8858, to report ownership in Foreign Disregarded entities, ie an NSULC.
Carson
<font face="Trebuchet MS">Thanks for the info on the NSULC. There is now a possibility that not all brothers would be engaged in each property. Would this scenario make sense: setup a NSULC that my wife owns 100% of. When properties are purchased, they can be bought by her NSULC directly (if just she is buying them), or by a numbered company, of which my wife would own the appropriate percentage?
For example, a numbered company buys a property. the numbered company is owned 33% by my wife's NSULC, 33% by brother 1 and 33% by brother 2. For example 2, my wife's NSULC buys a property outright. etc.
Is this solution invalidated if we ever moved to Canada [back in her case]?
Any tips / advice are appreciated. Tx</font id="Trebuchet MS">
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
My comments are without doing a complete analysis, but from memory, the NSULC would need to hold your wife's share of the properties **directly**, ie. NOT through another Canadian holding company. Purchases could always be made as tenants in commmon with the NSULC being part owner on one hand and the holding corporation being the other owner.
If the NSULC was instead a shareholder of the Holdco, then your wife would have the same issues as if she owned the Holdco shares directly.
The idea is that the NSULC is a disregarded entity (ie. a pass-through) for US tax purposes, allowing any net rental or capital gains to be taxed to your wife personally on her 1040 return. A foreign tax credit is allowed for the Canadian corporate tax paid by the NSULC.
This should continue to work if you move back to Canada.
Note, the IRS has produced a new two page form, Form 8858, to report ownership in Foreign Disregarded entities, ie an NSULC.
Carson
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charlesrei
- Posts: 6
- Joined: Mon Jan 31, 2005 8:32 am
<font face="Trebuchet MS"></font id="Trebuchet MS">I am now looking to buy a four unit in Nova Scotia. My wife and I are US Citizens / Residents. She is also a Canadian Resident. I would like to have the propety in my wife's name. That way if we move to Canada, she would have some income in her name for income splitting purposes.
My wife has no significant assets or income, so i would need to be on the mortgage to guarantee it. The mortgage broker said that she and I could own the property jointly and just run all of the income onto her tax return. Is this right?? Can we just decide that it all goes onto her return from the start? Seems odd, but wanted to see.
Any other recommendations?
My wife has no significant assets or income, so i would need to be on the mortgage to guarantee it. The mortgage broker said that she and I could own the property jointly and just run all of the income onto her tax return. Is this right?? Can we just decide that it all goes onto her return from the start? Seems odd, but wanted to see.
Any other recommendations?