US residents with second home in Vancouver Canada -
QUESTION:
We are U.S. citizens. My husband and I are looking into
buying a 2nd home in Vancouver,B.C. We would like to live in the house in the
summer and ( if able) rent it during the winter. We are very confused on the
taxes. Do we pay taxes on the income in Canada and the U.S.? Are US citizens
able to own and live in the property without being a Canadian citizen? I read
somewhere that the renters pay the tax directly to Canada if the owner is not a
Canadian
citizen.
---------------------------------------------------------------------------
david
ingram replies:
You can certainly buy a home here and use it for July and
august and rent it to University people from September to May/June with
impunity.
If you do that, you will have to file Canadian Tax
returns.
You should also read Garth turner's book, The Greater Fool (www.greaterfool.ca) and Ozzie Jurork's
book, FORGET ABOUT LOCATION, LOCATION, Location (www.jurock.com) before you buy. And read
the last two page AFTERWARD at the back of Garth's book BEFORE you read the
book. You will find that Garth still has a house, just the right
one. If you do not read the AFTERWARD first, the front of the book is too
too depressing.
Back to your tax returns.
In Order
Form NR6 before you rent it and by
Dec 31st of each year for the next year. In other words, if you were to
buy one to rent in September 2008, you would file an NR-6 before Sept 2008
another one in December 2008 for 2009 and another one in Dec 2009 for 2010 an
onward.
Form NR-4 (you and the agent who signed the NR-6 before March 31,
of each year.
US form 4868 to extend your US tax filing deadline
and maybe a state extension by April 15th.
Canadian Forms T1159 and T776
to report the rental income and possibly pay tax to Canada by June
30th
Schedule TDF 90-22.1 to report the foreign bank account that dealt
with the purchase of the Vancouver property. this is filed with the
Department of the Treasury in Detroit - Minimum penalty for not filing is
$10,000 - maximum $500,000. by June 30th.
The US 1040 with schedule E to
report the Canadian Rental and schedule 4562 for depreciation and schedule 1116
to claim any foreign tax credit for taxes paid to Canada by October 15, the date
extended to by the 4868 filed by April
15th.
-------------------------------------
The following is a little more
detailed.
QUESTION:
I work and reside in the US, but have a rental property in Canada. What deductions can I make, ie depreciation, renovation costs, mortgage interest, on my US tax return?
thanks
----------------------------
david ingram replies:
In Canada, you fill in and have an agent sign
a form NR6 BEFORE you rent out the condo. This form must be filled
in before the start of every new year. If you did not file one for 2008,
you should do so immediately. Then you must file a Sec 216(4) return
(form T1139) and a T776
to report the rent and any depreciation by June
30th.
NR6 at - http://www.cra-arc.gc.ca/E/pbg/tf/nr6/nr6-06e.pdf
NR4
(fillable) at - http://www.cra-arc.gc.ca/E/pbg/tf/nr4_flat/nr4-fill-07b.pdf
NR4-Summary
(fillable) at - http://www.cra-arc.gc.ca/E/pbg/tf/nr4sum/nr4sum-fill-07b.pdf
T1159
at: - http://www.cra-arc.gc.ca/E/pbg/tf/t1159/t1159-07e.pdf
T776
at: - http://www.cra-arc.gc.ca/E/pbg/tf/t776/t776-07e.pdf
Your
agent must also file form NR4 to report the gross rents received and any tax
remitted by March 31st.
-- for the US you must file Schedule E to report
the rent and expenses, schedule 4562 to calculate any depreciation on the
building and fixtures and schedule 1116 to claim a foreign tax credit for any
tax paid to Canada.
Schedule E at - http://www.irs.gov/pub/irs-pdf/f1040se.pdf
Schedule
4562 at: - http://www.irs.gov/pub/irs-pdf/f4562.pdf
Schedule
4562 Instructions (good luck) at: - http://www.irs.gov/pub/irs-pdf/i4562.pdf
Schedule
1116 (good luck) at - http://www.irs.gov/pub/irs-pdf/f1116.pdf
Schedule
1116 Instructions at: - http://www.irs.gov/pub/irs-pdf/i1116.pdf
---------------------------------------
Expenses
Accounting
Advertising
Business
License
Cablevision
commissions to rental agent
Common
expenses
Condo Strata Fees
Delivery
Garbage Removal
Insurance on the
property and public liability
Interest on Mortgage
Interest on repair
loan
Interest on Down payment loan
Legal expenses to collect rent or draw
lease but not to buy property (purchase legal expenses are
capitalized)
Maintenance
Management expenses
Motor vehicle - (very
restricted)
Office Expenses (stationary, receipts, etc., not a room for an
office in your home)
Postage
Property
taxes
Repairs
Utilities
Water
Rates
miscellaneous
_________________
You can goto www.centa.com and
click on TAX Guide in the top left box. If you click on RENTAL Income, you
will get something I wrote 20 years ago which is still apropos
today.
-------------------------------------------------
Or
this
----------------------------
Hello,
I have a home at a BC interior ski hill. We had it built in
2000 and had a rental agent there make a few rentals of it in 2001 and manage
it's upkeep for those rentals. He referred us to his CPA for tax returns. We
also used this rental agent for 2002. After that we changed to the agent
we still currently use. This last spring the first rental agent came up to me
and said he had to go to tax court and expected to lose the case and would owe
the government $8000.00. He said that it was our fault for not filing the 2001
return on time. This last May he sent me an email demanding the $8000.00 .
No documentation, explanation was provided. So is this possible and if so how
could it come about. What would my responsibility be. Revenue
Canada
gets my returns , they know who I am. I might add that the rentals were $14,000
gross and of course the mortgage interest was more than that so the return we
filed shows a small loss as is always the situation.
Thank
You
xxxxxxxxxxxxxxxxxxxxxx
Seattle
------------------------------------------------------------
david ingram
replies:
I wrote the following in my ULTIMATE TAX GUIDE in
1989. You can find it at
www.centa.com about two/thirds of the way
through the 'US/Cdn Taxation Section'. Note that it says clearly that the
agent is responsible to pay 25% of the gross if the US resident does not file
the tax return. In reverse, the US charges
30%.
----------------------------------------------------------------
RENTAL PROPERTIES - CANADA - OWNED BY U.S.
RESIDENT
More important perhaps is the problem with rental
properties in Canada. When owned by a non-resident, they are subject to a 25%
withholding (or 15% if living in Bangladesh) tax. If the renter does not pay
this tax, the government can come along two or ten years
later and demand the tax.
Imagine the consternation of a tenant of a house in the
British Properties in West Vancouver, or Rosedale in Toronto. Assume the tenant
has been paying $2,000 a month for a $500,000 house owned by a Hong Kong
resident. After three years of paying $24,000 a year to the `non-resident', they
finally buy a house and move. Two months later, there is a knock on the door and
a National Revenue representative is standing there demanding 25% of $72,000 for
NON-RESIDENT withholding tax (this is a true story by the way, only the owner
was in London).
There is a way around this problem. The tenant can ask
to see, or rather DEMAND to see a copy of the landlord's filed and accepted NR6
form. (See forms in back of book). This form allows the tenant or agent of the
landlord to deduct a lesser amount (or nil if a loss) than 25% of the gross
rent. It allows for expenses to be taken off and the tax can then be withheld at
25% of the net, rather than the gross. The property management division of david
ingram & Associates Realty Inc. files about 300 of these NR6 forms a year.
(This is only necessary if you are paying directly to a landlord whom you KNOW
to be a non-resident of Canada. If you are paying to an agent
or Canadian Resident, you are okay.)
Please note, the NR6 MUST BE FILED BEFORE the first rent
cheque is received or 25% of the gross rent must be remitted. For years, we were
in the habit of filing `this years' NR6 late with last years tax return. In
1989, National Revenue stopped accepting this sloppy practice and demanded them
on time.
IF YOU SIGN THIS FORM AS AN AGENT,
AND THE OWNER DOES NOT FILE HIS OR HER RETURN BY JUNE 30TH OF THE FOLLOWING
YEAR, YOU, THE AGENT, ARE RESPONSIBLE FOR THE 25% OF THE GROSS RENT WITH NO
REFUND PROVISIONS FOR ANYONE.
RENTAL PROPERTIES - UNITED STATES - OWNED BY A
CANADIAN
If paying 25% of the GROSS rent to Canada sounds bad,
cheer up. The United States taxes the Canadian 30% in the same situation. To
avoid this, the Canadian needs to notify the U.S. Government that he wishes to
be taxed as a business rental house on the "net income" received. But if you do
not notify the IRS in advance, the IRS CAN tax you at the 30% of gross
rate.
--------------------------------
In practical
terms, the CRA is not a bogeyman here. What usually happens is that the
Agent pays the 25% of the gross rent and issues an NR$ in your name crediting
you with the 25%. You do your tax return late and the CRA refunds the
money to you and you give the money back to the agent.
However,
that is only good for ONE time, AND if 'you' the owner are chronically late, the
agent is responsible.
I do not know enough to comment further.
However, Ii can tell you that at this moment, I have not personally seen a
single case where the money was not eventually refunded if the parties
co-operated.
If you filed an NR-6 for 2001 and 2002, this situation is
clearly spelt out on that form.. If you were not on time, and the agent suffered
a penalty and / or if you have not co-operated in the process, I would think
that you do owe the agent whatever he or she is penalized because his penalty is
based upon your failure to file on time.
If your returns were filed on
time, he is not subject to penalties.
One of the problems in Whistler is
that there were a dozen unlicensed and unregulated operations acting as property
managers. I personally informed 4 of them about their duties when their
clients (individuals like yourself) came to me to prepare their US/Canadian
income tax returns.
--------------------------------------
OR
THIS
-----------------------------------
I am a US citizen living in New
York, who purchased an investment home in Montreal in 2002. The home has been
rented out, but has never made a profit any year (due to mortgage, depreciation,
expenses, etc.). I am just being notified of the new non-resident tax situation
(form NR6) that I need to abide by.
I understand I need to find an agent
to help handle pass years non-resident income taxes and current/future
non-resident income taxes. If the property has never realized a profit,
how would recommend I proceed. Should i secure an accountant to act as my agent
to handle all past/current/future non-resident
taxes?
--------------------------------
david ingram replies:
There
is nothing new about the NR-6. I do not know when it was brought into play
but ii have been filling them in since the late 70's and the following was
printed in my 1989 book.
RENTAL PROPERTIES - CANADA - OWNED BY U.S.
RESIDENT
More important perhaps is the problem with rental
properties in Canada. When owned by a non-resident, they are subject to a 25%
withholding (or 15% if living in Bangladesh) tax. If the renter does not pay
this tax, the government can come along two or three or 15
years later and demand the tax.
Imagine the consternation of a tenant of a house in the
British Properties in West Vancouver, or Rosedale in Toronto. Assume the tenant
has been paying $2,000 a month for a $500,000 house owned by a Hong Kong
resident. After three years of paying $24,000 a year to the `non-resident', they
finally buy a house and move. Two months later, there is a knock on the door and
a National Revenue representative is standing there demanding 25% of $72,000 for
NON-RESIDENT withholding tax (this is a true story by the way, only the owner
was in London).
There is a way around this problem. The tenant can ask
to see, or rather DEMAND to see a copy of the landlord's filed and accepted NR6
form. (See forms in back of book). This form allows the tenant or agent of the
landlord to deduct a lesser amount (or nil if a loss) than 25% of the gross
rent. It allows for expenses to be taken off and the tax can then be withheld at
25% of the net, rather than the gross. The property management division of david
ingram & Associates Realty Inc. files about 300 of these NR6 forms a year.
(This is only necessary if you are paying directly to a landlord whom you KNOW
to be a non-resident of Canada. If you are paying to an agent
or Canadian Resident, you are okay.)
Please note, the NR6 MUST BE FILED BEFORE the first rent
cheque is received or 25% of the gross rent must be remitted. For years, we were
in the habit of filing `this years' NR6 late with last years tax return. In
1989, National Revenue stopped accepting this sloppy practice and demanded them
on time.
IF YOU SIGN THIS FORM AS AN AGENT, AND THE OWNER DOES
NOT FILE HIS OR HER RETURN BY JUNE 30TH OF THE FOLLOWING YEAR, YOU, THE AGENT,
ARE RESPONSIBLE FOR THE 30% OF THE GROSS RENT WITH NO REFUND PROVISIONS FOR
ANYONE.
RENTAL PROPERTIES - UNITED STATES - OWNED BY A
CANADIAN
If paying 25% of the GROSS rent to Canada sounds bad,
cheer up. The United States taxes the Canadian 30% in the same situation. To
avoid this, the Canadian needs to notify the U.S. Government that he wishes to
be taxed as a business rental house on the "net income" received. But if you do
not notify the IRS in advance, the IRS CAN tax you at the 30% of gross
rate.
-------------------------------------
What
you have to do is get the 2002 to 2006 returns in as soon as possible or be
prepared to pay 25% of your gross rent as tax plus penalties and interest if the
CRA catches you (remember the US IRS charges 30% in the same
circumstances).
Get someone to prepare the returns. If you would
like us to do them for you, that is what we do. Then get your NR-6 in with
a Canadian resident signing as an agent. You might even try making your
tenant the agent. Remember, if you file the NR-6, you can claim your
rental expenses and 25% is only withheld on a profit if any. Therefore, if
the gross rent was $1,000 and the expenses were $900, the agent only has to
remit $25.00 a month.
If there is a loss on a monthly basis, no tax has
to be remitted.
Just remember, it is NOT the amount of the mortgage
payment that is deductible. Only the interest portion is deductible so it
is possible to be out of pocket each month because of the principal portion of
the rental payments, but still owe tax.
When the actual return is
prepared, you can use depreciation to reduce any profit to zero and you will get
back any tax that was deducted.
Also remember, that the figures have to
be converted to US dollars and put on a schedule E of your 1040. This will
usually result in a refund on your US and New York 201 returns.
We can
prepare the Canadian and US return amendments if necessary - see
below.
----------------------------------
SUGGESTED PRICE GUIDELINES - May 17,
2008
david ingram's US / Canada Services
US / Canada
/ Mexico tax, Immigration and working Visa Specialists
US / Canada Real
Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N
3L7
Cell (604) 657-8451 -
(604)
980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 9 PM 7 days a week
Vancouver (LA) time - (please do not fax or phone
outside of those hours as this is a home office) expert US Canada Canadian American Mexican Income
Tax service help.
pert US Canada Canadian American
Mexican Income Tax service and
help.
David Ingram gives expert income
tax service & immigration help to non-resident Americans &
Canadians from New York to California to Mexico family,
estate, income trust trusts Cross border, dual citizen - out of
country investments are all handled with competence &
authority.
Phone
consultations are $450 for 15 minutes to 50 minutes (professional hour). Please
note that GST is added if product remains in Canada or is to be returned to
Canada or a phone consultation is in Canada. ($472.50 with GST for in person or
if you are on the telephone in Canada) expert US Canada Canadian American Mexican Income
Tax service and help.
This is not intended to be definitive but in
general I am quoting $900 to $3,000 for a dual country tax
return.
$900 would be one T4 slip one W2 slip one or two
interest slips and you lived in one country only (but were filing both
countries) - no self employment or rentals or capital gains - you did not move
into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no
rental
$1,300 would be the minimum with a move in or out
of the country. These are complicated because of the back and forth foreign tax
credits. - The IRS says a foreign tax credit takes 1 hour and 53
minutes.
$1,600 would be the minimum with a rental or two in
the country you do not live in or a rental and a business and foreign tax
credits no move in or out
$1,700 would be for two people with income from two
countries
$3,000 would be all of the above and you moved in
and out of the country.
This is just a guideline for US / Canadian
returns
We will still prepare
Canadian only (lives in Canada, no US connection period) with two or
three slips and no capital gains, etc. for $200.00 up.
However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms,
expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or
T5008 or T101 --- Income trusts with amounts in box 42 are an even larger
problem and will be more expensive. - i.e. 20
information slips will be at least $350.00
With a Rental for $400, two or three rentals for
$550 to $700 (i.e. $150 per rental) First year Rental - plus
$250.
A Business for $400 - Rental and business likely
$550 to $700
And an American only (lives in the US with no
Canadian income or filing period) with about the same things in the same range
with a little bit more if there is a state return.
Moving in or out of the country or part year
earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00
each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00
each.
18 RRSPs would be $900.00 - (maybe amalgamate a
couple)
Capital gains *sales) are likely $50.00 for
the first and $20.00 each after that.
Catch - up returns for the US where we use the
Canadian return as a guide for seven years at a time will be from $150 to
$600.00 per year depending upon numbers of bank accounts, RRSP's, existence of
rental houses, self employment, etc. Note that these returns tend to be
informational rather than taxable. In fact, if there are children
involved, we usually get refunds of $1,000 per child per year for 3 years.
We have done several catch-ups where the client has received as much as $6,000
back for an $1,800 bill and one recently with 6 children is resulting in over
$12,000 refund.
Email and Faxed information is convenient for the
sender but very time consuming and hard to keep track of when they come in
multiple files. As of May 1, 2008, we will charge or be charging a
surcharge for information that comes in more than two files. It can take
us a valuable hour or more to try and put together the file when someone
sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and
emails for instance.
This is a guideline not etched
in stone. If you do your own TDF-90 forms, it
is to your advantage. However, if we put them in the first year, the computer
carries them forward beautifully.
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