Ontario Landlord with North Dakota Rental Property

## US Rental Property Tax Guide for Ontario Landlords: North Dakota Edition Owning US rental property as a Canadian resident creates a unique tax situation. You'll file with both the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS), plus the State of North Dakota. Each jurisdiction taxes your rental income, and the rules don't always align. This guide walks you through your obligations on both sides of the border. ### Why Ontario + North Dakota Matters North Dakota borders Manitoba and Saskatchewan, making it geographically accessible for Canadian landlords. However, proximity doesn't simplify taxes. As an Ontario resident, you're subject to Canadian tax on worldwide income, including US rental profit. Simultaneously, North Dakota taxes you as a non-resident property owner at a flat 2.5% state rate, and the IRS applies federal tax at graduated rates up to 37%. The good news: Canada has a tax treaty with the US that prevents double taxation through foreign tax credits. The challenge: coordinating filings across two countries with different fiscal years (CRA uses calendar year; both US federal and ND use calendar year, so alignment is at least consistent), different depreciation rules, and different reporting forms. ## CRA Obligations: How Canada Taxes Your US Rental Income ### Reporting on Form T776 File **Form T776 (Statement of Real Estate Rentals)** annually with your personal tax return. Report: - **Gross rental income** in Canadian dollars (convert USD to CAD using the Bank of Canada annual average rate for the year; for 2025, use 1 USD = 1.36 CAD) - **Expenses** (property tax, insurance, maintenance, utilities, mortgage interest, property management fees) also converted to CAD at the same rate - **Capital cost allowance (CCA)** using the Canadian system (4% declining balance for residential rental property in most cases) The CRA does not allow you to deduct US income tax or state tax directly on T776. Instead, you'll claim a **foreign tax credit** on Form T2209 (Federal Foreign Tax Credit). ### Form T1135: Foreign Property Reporting If your North Dakota property's cost exceeds CAD $100,000, file **Form T1135 (Foreign Income Verification Statement)** with your tax return. Report: - Fair market value of the property (in CAD) at year-end - Income earned from the property (in CAD) Failure to file T1135 triggers penalties of CAD $25 per day (up to CAD $2,500 per year) if the CRA requests it. ### Foreign Tax Credit (Form T2209) This is critical. You'll pay tax to both Canada and the US. The foreign tax credit prevents double taxation. On **Form T2209**, you claim: - US federal income tax paid (from your IRS filing) - North Dakota state income tax paid (2.5% of taxable income) The credit is limited to the lesser of: 1. Foreign tax actually paid, or 2. Canadian tax on foreign income at Canadian rates **Example:** Your ND property generates USD $10,000 net rental income (CAD $13,600). You owe approximately CAD $4,420 in federal and provincial Canadian tax (Ontario marginal rate ~43.41% depending on income). You pay USD $1,500 in combined US federal and ND state tax (approximately CAD $2,040). You claim the full CAD $2,040 as a foreign tax credit on Form T2209. ## IRS Obligations: Filing as a Non-Resident Alien ### Obtain an ITIN You cannot use your Social Insurance Number (SIN) with the IRS. File **Form W-7 (Application for IRS Individual Identification Number)** with your US tax return to obtain an **ITIN (Individual Taxpayer Identification Number)**. Processing takes 4–6 weeks. Include: - Your passport or birth certificate - Form W-7 completed - Your return (Form 1040-NR) - Supporting documentation Once issued, use your ITIN on all future US returns. ### File Form 1040-NR Non-resident aliens file **Form 1040-NR (Non-Resident Alien Income Tax Return)**, not Form 1040. This form is required if: - You have US-source rental income, or - You had US tax withheld during the year On Form 1040-NR: - Report rental income on **Schedule E (Supplemental Income or Loss)** at line 1 - Report expenses on Schedule E - Calculate net rental income Unlike US citizens, non-residents cannot claim the standard deduction. Deductions are limited to those directly connected to US-source income. ### Section 871(d) Election: Avoid the 30% Withholding By default, US banks or property managers must withhold **30% of gross rental income** under Section 1441. However, you can file **Form 8288-B (Statement of Withholding on Dispositions by Foreign Persons)** to elect **Section 871(d) treatment**. This allows you to: - Report net rental income (income minus expenses) instead of gross income - Only withhold tax on net income, typically resulting in lower withholding - Claim depreciation and deductions File Form 8288-B with the IRS at least 30 days before the first rental payment is due. This election is highly recommended for property owners with significant expenses. ### Depreciation Under US Tax Rules Residential rental property depreciates over **27.5 years** under US tax law (vs. 25 years under Canadian CCA rules). Calculate annual depreciation as: **Building cost (excluding land) ÷ 27.5 = Annual depreciation deduction** Report depreciation on **Form 4562 (Depreciation and Amortization)** and carry it to Schedule E. ## North Dakota State Income Tax Obligations North Dakota taxes non-resident property owners at a flat **2.5% rate** on net rental income (income minus expenses). You must file **North Dakota Form ND-1 (Individual Income Tax Return)** if you have ND-source income. **Filing deadline:** April 15 (same as IRS) **What to report:** - Net rental income (after deducting property tax, insurance, maintenance, and depreciation) - ND state income tax is calculated as: Net income × 2.5% ND allows you to deduct property tax and mortgage interest directly. Many Ontario landlords find that after deductions, their ND taxable income is significantly lower than reported to CRA, because ND allows depreciation differently and CCA timing may differ. ### North Dakota Property Tax (Real Estate Tax) While not an income tax, ND property taxes typically average **0.98% of assessed property value** and are deductible on both your ND return and your CRA return (T776). Property tax assessments are handled by county assessors. Contact the county assessor's office in your property's county for the tax bill. ## Selling the Property: FIRPTA If you sell your North Dakota rental property, **FIRPTA (Foreign Investment in Real Property Tax Act)** applies. The buyer must withhold **15% of the sale price** if you're a non-resident alien. **Form 8288 (U.S. Withholding Tax Return for Disposition by Foreign Person)** is filed by the buyer's escrow agent. You'll receive a **Form 8288-B** statement showing the withholding. On your final US return, you'll report: - Sale price - Adjusted basis (cost plus improvements minus depreciation) - Capital gain or loss - FIRPTA withholding as a payment toward your tax liability Report the gain or loss on **Form 8949 (Sales of Capital Assets)** and Schedule D. ## Key Deadlines for Ontario Landlords | Obligation | Form | Deadline | Filed With | |---|---|---|---| | Canadian rental income reporting | Form T776 | June 15 (filing deadline: April 30) | CRA | | Foreign property reporting (if >CAD $100K) | Form T1135 | Same as tax return | CRA | | Foreign tax credit | Form T2209 | Same as tax return | CRA | | US non-resident tax return | Form 1040-NR | April 15 (or Oct. 15 with extension) | IRS | | ITIN application | Form W-7 | With first return | IRS | | Section 871(d) election | Form 8288-B | 30 days before first rental payment | IRS | | Depreciation schedule | Form 4562 | With Form 1040-NR | IRS | | North Dakota state return | ND Form ND-1 | April 15 | ND Department of Revenue | ## Key Takeaways