Ontario Landlord with New Hampshire Rental Property

## US Rental Property Ownership for Ontario Residents: A Complete Tax Guide for New Hampshire Landlords ### Overview: Why This Matters As an Ontario resident owning rental property in New Hampshire, you're subject to tax rules in *two* countries and must file with both the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS). The good news: New Hampshire has no state income tax, which simplifies your filing burden compared to landlords in other US states. However, this dual-jurisdiction status creates specific obligations. The CRA taxes your worldwide income (including US rental income), while the IRS taxes you as a non-resident alien on US-sourced rental income. Without proper planning, you could face 25–30% withholding on your gross rents—before expenses are deducted. Understanding the mechanics of these overlapping regimes, and the elections available to you, can save you thousands of dollars annually. --- ## Canadian Tax Obligations (CRA) ### Reporting Rental Income on Your T1 Return Rental income from US property must be reported annually on your Canadian personal tax return. You'll report this on **Form T776: Statement of Real Estate Rentals**, filed with your T1 General (personal income tax return). **What gets reported:** - **Gross rental income** (rents collected in Canadian dollars, converted at the Bank of Canada average annual exchange rate for the year) - All allowable deductions: mortgage interest, property taxes, insurance, repairs, property management fees, utilities (if you pay them), and depreciation (capital cost allowance, or CCA) - Net rental income or loss flows to Line 10400 of your T1 For 2025, the Bank of Canada average exchange rate is **1 USD = 1.36 CAD**. You must convert all US amounts using this rate (not daily rates for each transaction). ### Part XIII Withholding: The Critical First Step If you don't take action, the IRS will withhold **25% of your gross rental income** and remit it to the CRA under Part XIII withholding rules. This happens *before* expenses are deducted. **Example:** You collect $20,000 USD in gross rent. Without proper election, CRA withholds $5,000 (25%). You get $15,000. But your actual taxable income after deducting mortgage interest, property tax, and repairs might only be $8,000. You recover the excess withholding when you file your Canadian return, but this creates a cash flow problem and a delayed refund. ### Claiming Foreign Tax Credit You're entitled to a **non-business income tax credit** on Schedule 1 (Line 40501) of your T1 return for US federal income tax paid on this rental income. This prevents full double taxation. The credit is limited to the lesser of: - US tax actually paid - Canadian tax on the same income In practice, US tax and Canadian tax on rental income are often similar, so the credit typically covers most or all US federal tax owed. You *cannot* claim a credit for the 25% Part XIII withholding that the IRS collects automatically—this is a withholding, not a final tax. However, if you file a US return (see below), you can credit the withholding against your US tax liability. ### Form T1135: Foreign Property Reporting If your New Hampshire property has a fair market value exceeding **CAD $100,000** at any time during the year, you must file **Form T1135: Foreign Income Verification Statement** with your T1. Report: - Address and description of the property - Adjusted cost base (in CAD) - Fair market value at year-end (in CAD) - Income earned from the property (in CAD) Non-residents of Canada (relevant if you move back to the US) face a penalty of up to $8,000 per year if they fail to file this form. --- ## US Tax Obligations (IRS) ### Obtaining an ITIN You cannot use your Canadian Social Insurance Number (SIN) with the IRS. You must apply for an **Individual Taxpayer Identification Number (ITIN)** on **Form W-7: Application for IRS Individual Identification Number**. ITINs are free and typically issued within 4–6 weeks. You'll need your passport (or birth certificate) and a certified translation if it's not in English. Apply early—you'll need the ITIN to file your US return and to make the Section 871(d) election discussed below. ### Filing Form 1040-NR (US Tax Return for Non-Residents) As a Canadian resident, you're a "non-resident alien" for US tax purposes. You must file **Form 1040-NR: U.S. Income Tax Return for an Alien Individual** if you have US-source rental income. **What you report:** - **Schedule E: Supplemental Income and Loss** — all rental income and expenses from the New Hampshire property - Gross rental income - Deductions: mortgage interest, property taxes, insurance, repairs, maintenance, utilities, property management fees, depreciation, HOA fees (if applicable) - Net rental income The filing deadline is **June 15, 2025** for the 2024 tax year (non-residents get an extension). ### The Section 871(d) Election: Reduce Withholding to 30% By default, the IRS allows a **30% withholding** on rental income if you elect under **Section 871(d) of the US Internal Revenue Code**. This is lower than the 25% Part XIII withholding the CRA imposes, and it applies only to net income (after expenses), not gross rent. **How it works:** 1. You file Form 1040-NR reporting your actual expenses 2. You deduct expenses from gross rent to calculate taxable income 3. You owe 30% of taxable income to the IRS (not 30% of gross) 4. You credit this against your Canadian tax liability **Example (continued):** - Gross rent: $20,000 USD - Expenses (mortgage interest, property tax, repairs): $12,000 USD - Taxable income: $8,000 USD - US tax (30%): $2,400 USD = $3,264 CAD - No automatic withholding to the IRS This election is made simply by filing Form 1040-NR. You don't file a separate election form. ### Why Not Default to 30%? The default 30% withholding applies to *all* your non-business income from the US (dividends, interest, rental income). If your effective tax rate is lower, you'll owe additional tax when you file Form 1040-NR. However, if your effective rate is higher, you may get a refund. The Section 871(d) election is usually better for rental property owners because it allows you to deduct expenses first. --- ## New Hampshire's State Tax Advantage New Hampshire has **no state income tax** on either individuals or corporations. Unlike landlords in states such as Massachusetts, Vermont, or New York, you pay no state-level income tax on your New Hampshire rental income. New Hampshire does impose **property taxes** at the local level (county and municipal). The state's average effective property tax rate is **2.09%**, which is moderate compared to the national average of 0.81%. However, property tax is deductible on your US federal return, reducing your federal taxable income. **Bottom line:** New Hampshire ownership simplifies your US tax filing and eliminates a layer of tax that landlords in other states face. --- ## Selling the Property: FIRPTA Withholding If you sell your New Hampshire rental property, the buyer's attorney or title company must withhold **15% of the sale proceeds** under **FIRPTA (Foreign Investment in Real Property Tax Act, Section 1445)** and remit this to the IRS. You report the sale on **Form 8288: U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests** and must file this within 10 days of closing. In Canada, you report the sale on your T1 and calculate capital gains (50% inclusion rate, so 50% of the gain is taxable at your marginal rate). You can claim the 15% FIRPTA withholding as a credit against your Canadian tax on the gain, subject to the non-business income tax credit limits. --- ## Key Dates and Deadlines for 2025 | Obligation | Form | Deadline | Notes | |---|---|---|---| | **CRA: File Canadian return** | T1 General + T776 | June 15, 2025 (2024 tax year) | Use Bank of Canada annual average rate (1 USD = 1.36 CAD) | | **CRA: File T1135** | T1