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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:
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.
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.
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.
Deductions are not allowed against FDAP income. The IRS has designated the following items as examples of FDAP income:
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.
The Aylett Grant international tax specialists will require the following information in order to prepare and file your US income tax returns:
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.