New Brunswick Landlord with Alaska Rental Property

## Tax Guide for New Brunswick Landlords with Alaska Rental Property Owning rental property as a Canadian resident across the US border creates a unique tax situation. As a New Brunswick resident with an Alaska property, you face obligations to both the Canada Revenue Agency (CRA) and the US Internal Revenue Service (IRS). However, Alaska's lack of state income tax and relatively modest property tax rates offer meaningful tax advantages compared to other US states. This guide walks you through your filing requirements, tax elections, and deadlines in both jurisdictions. ## Why This Combination Matters **Alaska's tax advantage:** Alaska has no state income tax. This immediately eliminates a layer of tax complexity that landlords in other states (like California, New York, or Florida) must navigate. You will owe US federal income tax on your net rental income, but not Alaska state income tax. **CRA jurisdiction:** Because you are a Canadian resident, the CRA treats your worldwide income as taxable in Canada, including US rental income. The CRA also imposes withholding requirements on rental income paid to non-resident investors. **Exchange rate impact:** All US dollars earned must be converted to Canadian dollars using the Bank of Canada annual average rate (approximately 1 USD = 1.36 CAD for 2025). This conversion affects both your reported income to the CRA and your foreign tax credit calculations. ## Your CRA Obligations ### Reporting Rental Income on Form T776 You must report your Alaska rental income on the **CRA Form T776: Statement of Real Estate Rentals**. This form is filed with your annual personal income tax return (Form T1 General). On the T776, you report: - **Gross rental income** in Canadian dollars (converted at Bank of Canada annual average) - **Allowable expenses**, including property tax, mortgage interest, insurance, utilities, maintenance, and property management fees (also in CAD) - **Capital cost allowance (CCA)** on the building (not land) if you choose to claim depreciation **Key point:** Your net rental income (after expenses) is added to your total income and taxed at your marginal rate in New Brunswick. ### Form T1135: Foreign Property Reporting If the fair market value of your Alaska property exceeds **$100,000 CAD**, you must file **Form T1135: Foreign Income Verification Statement** with your tax return. On this form, report: - Adjusted cost basis of the property - Fair market value as of December 31 of the tax year - Country (United States) - Type of property (real property — rental) - Income generated in the year Failure to file Form T1135 when required results in a minimum penalty of **$250**, with potential increases to $2,500 or more for repeated failures. ### Foreign Tax Credit (FTC) The US will impose federal income tax on your net rental income. You are entitled to claim a **foreign tax credit** on your Canadian return for US federal taxes paid. The foreign tax credit calculation is complex: - Calculate your Canadian tax on worldwide income - Calculate what tax would be on your US-source income only at Canadian rates - The credit is limited to the lesser of: (a) US tax actually paid, or (b) Canadian tax on US-source income **In practice:** Because Alaska has no state income tax, your US federal tax bill will be the primary foreign tax paid. The US applies a 30% default withholding rate on rental income paid to non-residents, but you can elect to use Section 871(d) (see below) to reduce this. ### Part XIII Withholding (If No IRS Election Filed) If you do not file a **Form W-8BEN-E or make a Section 871(d) election with the IRS**, any property manager or tenant paying you rental income may be required to withhold **25% as Part XIII tax** under the Canada-US Tax Treaty. This withholding is remitted to the CRA and credited against your final Canadian tax liability. However, it is excessive and avoidable with the proper IRS election. ## Your IRS Obligations ### Obtain an ITIN You cannot use your Canadian Social Insurance Number (SIN) to file US tax returns. You must apply for a **US Individual Taxpayer Identification Number (ITIN)** using **IRS Form W-7**. Submit Form W-7 with: - Proof of Canadian identity (passport) - Proof of Canadian residence - Original documents or IRS-certified copies (not photocopies) Processing typically takes 6–8 weeks. You can file your US return while awaiting your ITIN by entering "Applied For" in the ITIN field. ### File Form 1040-NR and Schedule E As a non-resident alien (NRA) earning US-source income, you file **Form 1040-NR: U.S. Nonresident Alien Income Tax Return** (not Form 1040). On **Schedule E (Form 1040): Supplemental Income and Loss**, report: - Gross rental income - Mortgage interest, property taxes, insurance, utilities, repairs, depreciation, and other expenses - Net rental profit or loss Your net income is subject to **graduated US federal income tax rates** (10%, 12%, 22%, 24%, 32%, 35%, or 37% depending on income level). Non-residents also pay a flat **3.8% Net Investment Income Tax (NIIT)** on net rental income. ### Section 871(d) Election (Critical Tax Saving) **This election is essential for most Canadian landlords.** By filing **Form 8288-B: Statement of Withholding on Dispositions by Foreign Persons and Corporations** along with your Form 1040-NR, you can elect to be taxed on **net rental income** (after expenses) rather than gross income. Without this election, the IRS assumes a default withholding of 30% on gross rents. **Example impact:** - Gross rent: $20,000 - Allowable expenses: $8,000 - Net income: $12,000 Without Section 871(d) election: 30% withholding on $20,000 = **$6,000** With Section 871(d) election: Tax on $12,000 at ~22% federal rate = **~$2,640** **Filing the election:** Include Form 8288-B with your 1040-NR return. You must also provide a copy to your property manager or tenant so they withhold on net income instead of gross. ## Alaska's State Tax Advantage Alaska imposes **no state income tax** on any type of income. This is a significant advantage compared to owning property in California (up to 13.3%), New York (up to 10.9%), or Florida (no state income tax but higher property tax at 0.83%). Your only state-level obligation in Alaska is property tax. Alaska's statewide effective property tax rate is approximately **1.19%** (well below the US average of 1.28%). Some boroughs charge slightly higher rates; check your specific municipality. Property taxes are deductible on both your US and Canadian returns. ## Selling the Property When you sell your Alaska rental property, US federal income tax applies to your capital gain (sale price minus adjusted basis). This is governed by **FIRPTA (Foreign Investment in Real Property Tax Act)**. **FIRPTA rules:** - The buyer must withhold **15% of the sale price** (with limited exceptions) and remit it to the IRS - You report the capital gain on your Form 1040-NR in the year of sale - The gain is subject to graduated US federal tax rates plus the 3.8% NIIT - You claim the withholding as a credit on your return You must also report the capital gain to the CRA and can claim a foreign tax credit for US tax paid. Canadian capital gains rules apply to 50% of your gain (the inclusion rate). ## Key Deadlines for New Brunswick Landlords | Obligation | Form(s) | US Deadline | CRA Deadline | Notes | |---|---|---|---|---| | US income tax return | 1040-NR, Schedule E | June 15* | — | *Extended deadline for non-residents; Oct. 15 with extension | | Section 871(d) election | 8288-B | June 15* | — | Must be filed with 1040-NR | | Canadian tax return | T776, T1135 | — | June 15** | **15 days after filing return if self-employed | | Foreign property reporting | T1135 | — | June 15** | Required if property > $100K CAD | | ITIN application | W-7 | Anytime | — | Apply early; processing 6–8 weeks | ## Key Takeaways for New Brunswick Landlords - **No state income tax in Alaska**: You avoid Alaska income tax entirely, reducing