With tax season fast approaching in Canada and the U.S., many Canadian snowbirds need to take special care when filing their tax returns, as snowbirds can be subject to a number of tax rules and requirements that often don’t affect other Canadians.
Make sure you consider the following well in advance of the tax filing deadline every year to help avoid potentially major headaches and tax liabilities.
Which snowbirds need to think about cross border tax filing issues and why:
Canadians who own U.S. real estate
Canadians who own U.S. real estate, that is for personal use only, do not have an annual filing requirement related to the property. They will, however, have to file a tax return in the year that they sell the property to report the gain and pay tax to the IRS.
The individual would need to obtain a US Individual Tax Identification Number (aka “ITIN”) in order to file the return with the IRS.
Canadians who earn rental income from U.S. real estate
Canadians who rent out their personal U.S. vacation home less than 15 days each year are not required to report the rental income to the IRS. However, Canadians who earn rental income from the U.S. from investment properties, or if they have rented their personal vacation home for more than 15 days, will have to file a tax return each year to report the income earned to the IRS.
There may be a state tax return required as well, depending on where the real estate is located. Florida does not have a personal income tax, but states such as Arizona or California do.
Even if there is a net loss on the rental property, the taxpayer should still file with the IRS to claim that loss for the year. In the year the property is sold, the losses will be used to offset some the gain a taxpayer will have to pay tax on.
Taxpayers can deduct mortgage interest, property taxes, insurance, maintenance and other costs against the rental income earned. Again, the individual would need to obtain a US Individual Tax Identification Number (aka “ITIN”) in order to file the return with the IRS.
Canadian snowbirds will also have to report the rental income from U.S. real estate on their Canadian tax return regardless of how many days the U.S. property is rented to others. All of the amounts will be converted to Canadian dollars. They should claim a foreign tax credit for any income taxes paid to the IRS or any state government on the rental income.
Canadians who rent out their home in Canada while they are away
While it's not a "cross border" tax issue, Canadians who earn rental income in Canada will have to report this income on their Canadian return.
They can deduct the portion of their mortgage interest, property taxes, insurance, maintenance and other costs that apply to the rental period against the rental income earned.
Canadians should be careful when renting out their principal residence while they are away, as doing so can prevent the gain on the eventual sale of the property from being a tax-free transaction.
If a Canadian is going to be renting their home on a regular basis, the CRA could consider the property to have had a “change in use”. Canadians should be sure to file the proper “no change in use” election with the CRA to avoid their principal residence from being viewed as a rental property.
Canadians who sold real estate in the U.S. in the past year
Canadians that are not U.S. citizens who sold real estate in the U.S. will have to file a tax return to report the gain or loss on the sale to the IRS, and state taxing authority depending on where the real estate is located.
Again, the taxpayer will require a US Individual Tax Identification Number (aka “ITIN”) in order to file the tax returns. There likely will be taxes required to be withheld by the buyer at the time the property is sold. These taxes would be remitted to the IRS using the ITIN of the taxpayer that sold the property.
If a property is jointly owned by two individuals that are not U.S. citizens, they each will have to file a U.S. return to report their share of the gain or loss on the sale.
If the property sells for less than $300k, there is no tax required to be withheld at the time of the sale. Regardless if tax is withheld or not, and regardless of the purchase price, a tax return is required to be filed.
- What if one of the joint owners is a dual citizen? Dual citizens would also report the sale on both their US and Canadian tax returns. There will be no tax withholding requirement imposed on a buyer who is purchasing a property from a dual citizen. If a US real estate property is jointly owned and one of the owners is not a US citizen, the withholding requirements will apply to the 50% of the proceeds that are payable to the non-US citizen owner.
Dual Citizens tax requirements
Dual citizens should be filing income tax returns in both the US and Canada to report their worldwide income on both returns. They should ensure that their returns are prepared properly so that they are not taxed on the same income twice.
Dual citizen snowbirds may have income from both US and Canadian sources. This can complicate things, as they will have foreign tax credits appearing on both returns.
Dual citizen snowbirds want to be careful and make sure they are filing Form 1040 with the IRS, and should not file Form 1040NR even though they are non-residents of the U.S. As a U.S. citizen, they are not permitted to file Form 1040NR regardless of where they live.
Dual citizens also want to ensure that they are paying attention to all of the foreign asset disclosure forms required by both the US and Canada as there are hefty penalties, on both side of the border, for failing to file these forms.
Canadians who own over a certain amount of U.S assets
Canadians that own foreign property with a cost of over $100,000 CAD at any time in the year, must file Form T1135, Foreign Income Verification Statement, with the Canada Revenue Agency to disclose the property.
However, personal use real estate located outside of Canada is not included and should not be disclosed.
Rental properties located outside of Canada would be disclosed. Foreign bank accounts should be disclosed. Shares in foreign companies, even if held in a Canadian brokerage are required to be disclosed.
Any property used mainly for personal use and enjoyment, such as a vehicle, vacation property, jewellery, artwork, or any other such property would not be disclosed.
Canadians who earn income from U.S. investments
Canadians who earn income from US investments will receive various tax slips at year end reflecting their income. Depending on the type of investment, the type of income earned, and the tax withholding that is done by the investment company, Canadians may or may not be required to file a US tax return.
Typically if the proper amount of tax has been withheld from the income, a US return would not be required. If the investment involves real estate, a US return typically would be required.
If a Canadian invests in a US partnership, they will receive a form called Schedule K-1, and will likely be required to file a US tax return.
As previously mentioned, the individual would be required to obtain an ITIN in order to file a US tax return.
In addition, any income earned from US investments would have to be included on the taxpayer’s Canadian tax return. They would claim a credit for the taxes they have paid to the U.S.
Canadians who are Dual Citizens would file a US tax return regardless, and would always report their worldwide income on the tax return they file in both countries.
Snowbirds or other individuals that spend substantial amounts of time in the U.S.
Snowbirds should be filing IRS Form 8840 each year in the US to document the number of days they were physically present in the US and claim their closer connection to Canada, so that they are not viewed as residents of the US for tax purposes. Please refer to the article on U.S. Residency Rules for Canadian Snowbirds for more details.
The bottom line…
It is always wise to get professional advice from experts in Canadian and U.S. tax experts. Ignorance of the law and requirements in either country is not a defense!