The following information is intended to assist our clients to understand the documents and information that are required by Aylett Grant to prepare your US income tax returns and other information filings required by the IRS. The sooner and more completely that we receive this information, the more efficiently our cross border tax specialist can process your US returns and the more you will save.
US Income Tax on Rental Property
A Canadian resident who owns a residential property in the United States that has been rented to another party for any part of the tax year must elect one of the following two options:
- Pay a tax equal to 30% of the gross rent.
- Pay tax on the net rental profits.
If you elect the first option your rental agent will probably withhold the tax and forward it directly to the IRS and you are not required to file a US tax return. If you do not have a rental agent you must forward the tax yourself within 20 days of receiving the rent or 20 days after the end of each quarter as determined by the IRS. You are required to file form 1042 by March 15 of the year following the tax year. Failure to forward the required monthly or quarterly tax installments to the IRS or failure to file form 1042 can result in severe financial and criminal penalties. The maximum fine for this offence is $100,000.00 US. (More detailed information is set out in our page titled “Canadians Buying a House in the US”).
If you are a Canadian resident that owns a US rental property and have elected to pay tax on the net rental profit you must file a United States income tax return. You must also file a United States income tax return if you have been deemed to have a substantial presence in the US (substantial presence test) or if you possess a US green card or have applied for a green card (green card test). Additionally, you must file a US income tax return for the tax year in which you have sold a US residential property.
If you are deemed to be a US resident by way of having a substantial presence in the US, the IRS requires that you pay US taxes on your worldwide earnings. It is always a good idea to avoid this situation. We recommend that you refer to our page entitled “Canadians Planning to Spend an Extended Period in the United States” for additional information.
US Income Tax on FDAP Income
Every foreign person that receives source income in the United States that is defined as Fixed, Determinable, Annual, or Periodical (FDAP) income is subject to a 30% tax (or lower treaty rate if applicable). The FDAP tax applies to the gross amount of U.S. source fixed or determinable, annual or periodic gains, profits, or income.
- Income is fixed when it is paid in amounts known ahead of time.
- Income is determinable whenever there is a basis for figuring the amount to be paid.
- Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals.
- Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased.
Examples of FDAP Income
Deductions are not allowed against FDAP income. The IRS has designated the following items as examples of FDAP income:
- Compensation for personal services
- Original issue discount
- Pensions and annuities
- Real property income, such as rents, other than gains from the sale of real property
- Scholarships and fellowship grants
- Other grants, prizes and awards
- A sales commission paid or credited monthly
- A commission paid for a single transaction
- The distributable net income of an estate or trust that is FDAP income, and that must be distributed currently, or has been paid or credited during the tax year, to a nonresident alien beneficiary
- A distribution from a partnership that is FDAP income, or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner
- Taxes, mortgage interest, or insurance premiums paid to, or for the account of, a nonresident alien landlord by a tenant under the terms of a lease
- Prizes awarded to nonresident alien artists for pictures exhibited in the United States
- Purses paid to nonresident alien boxers for prize fights in the United States
- Prizes awarded to nonresident alien professional golfers in golfing tournaments in the United States
The 30% FDAP does not apply to income or gains from U.S. sources that are effectively connected with a U.S. trade or business owned by a non-resident alien.
We can Help
You may qualify to file a US income tax return that may reduce the amount of US tax that you have paid by way of a tax treaty or your presence in the US. Let the cross border tax experts at Aylett Grant review your tax files to determine if you qualify for a tax refund or if you are entitled to a tax set-off under the provisions of the Canada-US Tax Treaty. Our international tax specialists will assist you to file all required IRS and individual state forms and tax returns to ensure that you have received the lowest tax rate possible. The qualified tax accountants at Aylett Grant ensure that all services that we provide will be timely, accurate, and reasonably priced.
Penalties are Applied for Failing to File US Income Tax Returns on Time
Taxpayers subject to US taxes should be aware that there are substantial penalties for late filing or failing to file US tax returns. In fact the IRS can levy a penalty for an inadvertent mistake made by a taxpayer in preparing his income tax return or simply failing to attach a required schedule or form. We recommend that you have a tax expert review your US tax return before you submit it to the IRS. The Aylett Grant cross border tax experts will review your tax returns and assist you to accurately prepare and file all required returns and supporting documents to ensure that you enjoy the most pleasant and worry free experience possible. Our expert tax accountants will handle all your tax requirements accurately and timely at reasonable cost.
Information Required to File a US Income Tax Return
The Aylett Grant international tax specialists will require the following information in order to prepare and file your US income tax returns:
- Your Name, Birth Date, and Address.
- Your US Individual Tax Identification Number (ITIN) (if you do not yet have one the Aylett Grant tax experts will assist you to obtain your ITIN.
- Address of any rental property, date of purchase, and cost.
- The number of days that you rented the property.
- The number of days that the property was available to be rented.
- The number of days that you or your family vacationed in the rental property.
- The name and address of your rental agent.
- The name(s) of the person renting the property and a copy of any lease or rental agreement.
- Statement of rental revenue and expenses. If your rental agent has not prepared one please bring copies of all expenses that you have paid on behalf of the rental property.
- The Number of days that you spent in the US for each of the past three years. A day is defined as any period of time that you were physically present in the US during a 24-hour period. There are certain exceptions that the tax specialists at Aylett Grant can assist you with.
- A copy of your last year’s US tax return if applicable.
- A copy of your current Canadian tax return.
- All other income from any source in the United States for the current tax year.
- All correspondence with the IRS.
- All correspondence with any other United States government agency.
The more completely that you provide this information the more efficiently our cross border tax specialists can prepare your IRS returns and the more money you will save. Our goal at Aylett Grant is to provide our clients with accurate and timely services in the most efficient and economical manner possible.