Welcome

We are not professionals, nor should any of the content here be used without professional validation to make decisions for your situation. Since entries appear with the most recent on at the top, if you would like to read in a chronological order start at the bottom.

If you feel that the experience shared here has helped you save time and money please consider donating to help spread the costs of acquiring it. Any contribution is appreciated. By way of thanks, anyone who donates will receive bonus materials:

- Current copy of detailed notes

- A sample accounting spreadsheet we use instead of costly accounting software

- A sample Statement of Qualification and Operating Agreement for an LLP

Thanks and good luck with your property!

Monday, April 8, 2013

US Rental Income on Canadian Tax forms


I mentioned a few alternative ways to record US property rental income on Canadian Tax forms a couple of blog entries below. A blog reader (B) and I have been trying the methods in TurboTax. Here is an update.

In previous years I had entered the income on T776 forms...one for each property. This has worked well to date with the two minor irritations: 1) TurboTax didn't like US postal codes so that had to be fudged; and 2) the Canadian depreciation formula is a bit different from the US formula requiring separate tracking.

Well, now I can add another more serious concern. This is the first year we had to pay US tax. We have always had to file US returns but this year there was enough income that a bit of tax was due. So, naturally, we would want to claim a Foreign Tax Credit to recover that tax paid on the Canadian return to avoid double taxation. No go. The T776 is not implemented by TurboTax to support foreign properties so it doesn't accept an input for foreign tax paid. No problem, right? Just enter it on a FTC worksheet? Nope. Turbotax is too helpful. You can't enter the foreign tax paid directly on the FTC worksheet...you drill down until you get to...wait for it...yep, the Foreign Slips input sheet. That's the same input sheet used in the other method of entry where the amounts roll up to "Other Income". And for the FTC be accepted, the accompanying foreign income must be reported there as well. That makes entering it on the T776 a duplication.

I called the Tax Expert service provided by Intuit. They were very helpful and understood the question, but could not find a good workaround for entering the foreign tax paid while using the T776 either. Potentially using a T5013, but that may have other implications, and I did not try that.

So, for our case, I have switched to recording the US Rental income as Other Income / Income from Foreign Slips. It is very simple, keeps the details of accounting on the US side of the border, and allows the entry of foreign tax paid in support of the FTC. The "foreign slip" is the K1 slip(s) generated by the LLP(s) in the US if the properties are held in LLPs. The foreign tax paid comes from the individual's 1040NR (US Federal) and 140NR (State) returns.

Having said that, B (the blog reader who has been helping test this) has also tested UFile (competitor to TurboTax) and found that FTCs can be manually entered on a T2209. So if using UFile, T776s can be used to record the income and expenses, and T2209s to record the FTCs. This may be a good option if you want to take advantage of differences in how depreciation is handled in Canada versus the US. For example I believe Canada provides the option to not depreciate a property (and therefore not be reducing the cost basis of the property for a future capital gain calculation).

19 comments:

  1. I am having a similar problem with creating the NetFile output file. Turns out this year (2012) the CRA system no longer supports post codes on Form 776 form for non Canadian rental property address in my case UK. This used to work perfectly well in the past.

    Turns out this year the CRA have put a restriction on Netfilings for:

    ou have income from a business with a permanent establishment outside your province or territory of residence (you have to complete Form T2203, Provincial and Territorial Taxes for 2012 - Multiple Jurisdictions).

    http://www.netfile.gc.ca/rstrctns-eng.html#other

    Hope this helps.

    ReplyDelete
    Replies
    1. Interesting. I guess TurboTax was a little ahead of the CRA in restricting non Canadian formats. When I used T776s I put the full address including US zip code in the address field and then put a Canadian postal code in the postal code field...just to get past the edit. But now we have reached the FTC constraint with that method so just switched over to reporting the revenue as Other Income from Foreign Slips. It does seem odd that the CRA doesn't make this more straightforward given the number of Canadians with foreign rental property.

      Delete
  2. I use StudioTax and haven't had the FTC constraint. Thanks for the tip about fudging the postal code field. I'll call CRA in the morning on that one and then spend the requisite time waiting as they find an answer from someone. I should be owing in 2013 so that'll add another layer on this.

    ReplyDelete
  3. Using the Other Income category rather than the T776s would also be useful in my situation. We have US charitable donations that TurboTax won't recognize because the program doesn't recognize the T776 income as US income. If your method is legit, it would sure help.

    ReplyDelete
    Replies
    1. The TurboTax Tax Expert recommended that approach. I do not know of any reason why it would not be legit. But that is not saying that it is the only answer.

      Delete
  4. Before agreeing to manage U.S. real property for a foreign taxpayer, a real estate professional or rental agent should discuss with the foreign client whether the rental income will be taxed as investment income through withholding, or on a net income basis as “ effectively connected with a U.S. trade or business,” without withholding (although the owner may have to file estimated tax returns). Rental income from real property located in the United States and the gain from its sale will always be U.S. source income subject to tax in the United States regardless of the foreign investor's personal tax status and regardless of whether the United States has an income treaty with the foreign investor's home country.

    ReplyDelete
  5. You can override form fields in TurboTax by pressing F2 when the cursor is in the field.

    Using this I could report all the US properties on T776 forms and track the depreciation correctly for Canada.

    To get the FTC, I overrode lines 431 and 433 on T2209. This way the income is not duplicated. I just added up the Net Incomes for the foreign properties on the "Summary of Real Estate Rentals" to get the number for line 433.

    ReplyDelete
  6. And what about the formT1135: the Foreign income verification statment? Do you fill it as it seems mandatory for foreign investment over 100K.
    Also, which version of TurboTax are you using?
    Thanks!

    ReplyDelete
    Replies
    1. Yes, we fill out T1135 forms as well. We use TurboTax Standard.

      Delete
    2. I have a few more questions on which I would like to get your perspective:
      We own rental condos under a LLP in Arizona that we bought in 2013. We are doing our first tax report. On the Canadian side, I will use the 'Foreign income' approach and all your info was very usefull for making this decision. One of the impact is that it will present net US results including depreciation. If we would do the same exercice with the T776, I would assume that the net result would be at the same level if we would add the Canadian depreciation. As we won't use T776, what would be the impact on the gain on disposition in Canada the day we will sell the condos? I assume that we should use a depreciate value of the condo for the canadian side to remain logic?

      Another question about T-1135 form where we must report the 'maximum cost during year' and 'cost amount at year end' Would you put for the first the amount before the depreciation and for the last, the amount after depreciation?

      Delete
    3. US and Canadian depreciation rules and rates are different in two ways: 1) the calculations are slightly different, and 2) the IRS takes the view that depreciation has been done, whether or not you actually claimed it, when calculating the cost basis when you sell. Essentially depreciation is mandatory in the US while I believe it is optional in Canada. Assuming you want to take depreciation, then yes I think just reporting the net profit as foreign income is the way to go. In that event Canadian depreciation calculations don't apply and there is not T776. I haven't got to selling a property yet, but I assume that the capital gain will just be calculated in the US and then converted to Canadian dollars for reporting in Canada. I haven't looked into detail of how that is done or where on the forms it gets reported. Hopefully one of the readers will get there first and report findings!

      Delete
  7. this was a really nice explanation for the US Rental Income on Canadian Tax forms topic. as an accountant in mississauga i just go throw your blog and found your tips was really informative had solved my problem with one of my client's situation. i will keep reading your blog as this kind of query can be solved by just experiance sharring not just reading a books keep blogging thanks.

    ReplyDelete
  8. I have exactly same problem as discussed in the blog. I am using Ufile and am not able to avoid duplication of income. How do I override form T2209 so that I can get the credit and also avoid duplication of income.
    Thanks

    ReplyDelete
  9. This comment has been removed by the author.

    ReplyDelete
  10. This comment has been removed by the author.

    ReplyDelete
  11. Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.

    sell my commercial property Coventry, we buy any house Nottingham

    ReplyDelete
  12. Really great news!!! this information is well worth looking everyone. Good tips. I will be sharing this with all of my friends! Thank you for sharing valuable information.
    _______________________
    Rental Property

    ReplyDelete
  13. This is a really good read for me, Must admit that you are one of the best bloggers I ever saw.

    Property and houses for sale in Marloth Park & Stand for Sale in Marloth Park

    ReplyDelete