Canadian-US Tax Implications: Essential Guide for Cross-Border Real Estate Investors

With Canadian real estate prices reaching new heights, many investors are looking south of the border for better returns. Ping Hsu and Property Hustlers have helped numerous Canadians navigate US real estate investments, but understanding the tax implications is crucial before making your first cross-border purchase.

Key Ownership Structures for Canadian Investors

Direct Personal Ownership

Most Canadians initially hold US property in their personal name, which offers:

  • Simplicity and lower costs

  • Preferential capital gains treatment

  • Straightforward financing

The drawbacks include direct exposure to US estate tax and personal liability for any claims.

LLC Ownership

Limited Liability Companies (LLCs) are popular with US investors but create complications for Canadians:

  • US Tax Benefit: Pass-through taxation in the US (no entity-level tax)

  • Canadian Tax Problem: The CRA treats US LLCs as corporations regardless of their US tax status

  • Double Taxation Risk: Income may be taxed in both countries at different times

  • Additional Reporting: Canadian owners must file Form T1134 with potential penalties

Alternative structures like US Limited Partnerships often work better for Canadians as they receive flow-through treatment in both countries.

Tax Implications During Property Ownership

Rental Income Taxation

When earning rental income from US properties, you face tax in both countries:

US Tax on Rental Income:

  • 30% withholding tax on gross rental income by default

  • Make the “net income election” under Section 871(d) to be taxed on net income after expenses

  • File Form 1040NR annually

Canadian Tax on Rental Income:

  • Report worldwide income to the CRA

  • Convert income to Canadian dollars

  • Claim foreign tax credits for US taxes paid

Case Study: $100,000 Profit from Ohio Property

Let’s examine how a $100,000 profit from selling US property in Ohio would be taxed for an Ontario resident in 2025:

Scenario Details

  • Property in Ohio purchased for US$200,000 (CAD$268,000)

  • Sold in 2025 for US$275,000 (CAD$368,000)

  • Capital gain: US$75,000 (CAD$100,000)

US Tax Treatment

  • FIRPTA withholding: 15% of gross sale price = US$41,250

  • Long-term capital gain tax: 15% of gain = CAD$15,000

  • File Form 1040NR to claim refund of excess withholding

Ontario Tax Treatment

  • 50% of capital gains are taxable = CAD$50,000

  • Ontario marginal tax rate: 43.41%

  • Canadian tax: CAD$50,000 × 43.41% = CAD$21,705

  • Foreign tax credit: CAD$15,000

  • Net Canadian tax: CAD$6,705

Total Tax Impact

  • Total tax paid: CAD$21,705 (21.7% effective rate)

  • Temporary cash flow impact: US$41,250 withheld at closing

  • Refund after filing: US$26,250 (typically 6-12 months wait)

Comparison: Ontario vs. Ohio Property Sale

Let’s compare selling a property with a $100,000 profit in Ontario versus Ohio:

Tax Component Ontario Property Ohio Property
Sale price (assumed) CAD$368,000 US$275,000
Capital gain CAD$100,000 CAD$100,000
Withholding at sale None US$41,250 (15% FIRPTA)
US federal tax N/A CAD$15,000 (15%)
Canadian tax (Ontario) CAD$21,705 CAD$21,705
Foreign tax credit N/A CAD$15,000
Net Canadian tax CAD$21,705 CAD$6,705
Total tax paid CAD$21,705 CAD$21,705
Net profit after tax CAD$78,295 CAD$78,295
Filing requirements T1 only T1 + 1040NR

Key Insight: While the end tax burden and net profit are identical in both scenarios (with proper use of foreign tax credits), the Ohio property requires additional filing requirements. The FIRPTA withholding is eventually refunded after filing your US tax return.

Step 1: Gather Documentation

  • Keep detailed records of all US taxes paid

  • Obtain official tax receipts or IRS transcripts showing tax payments

  • Convert all amounts to Canadian dollars using appropriate exchange rates

Step 2: Complete Form T2209

  • Use Form T2209 “Federal Foreign Tax Credits” to calculate your credit

  • Submit a separate form for each country where you paid tax

  • File separate forms for business and non-business income

Step 3: Calculate the Credit

The foreign tax credit you can claim is limited to the lesser of:

  • The actual foreign tax paid

  • The amount of Canadian tax payable on the same income

Step 4: Apply Proper Exchange Rates

  • Use the Bank of Canada exchange rate in effect on the day the income or tax was paid

  • For multiple payments throughout the year, you may use the annual average exchange rate

Step 5: Attach Supporting Documents

  • Include copies of foreign tax returns and payment receipts with your Canadian tax return

  • Maintain all documentation for at least six years

Key Points to Remember:

  • Foreign tax credits are non-refundable (they can only reduce tax to zero, not below)

  • Unused foreign tax credits for business income can be carried back 3 years or forward 10 years

  • Some provinces and territories also offer a foreign tax credit on their provincial tax returns

  • In Ontario, you can claim the provincial foreign tax credit using Form ON428

Having proper documentation and claiming foreign tax credits correctly is essential to ensuring you don’t pay more tax than necessary on your US property investments.

Foreign Reporting Requirements

T1135 Foreign Income Verification Statement

One commonly overlooked requirement is the T1135 form:

  • Required if foreign property exceeds CAD $100,000

  • US real estate for investment must be reported

  • Personal-use property (like vacation homes) generally exempt

  • Penalties range from $25 per day to a maximum of $2,500

US Estate Tax Considerations

One commonly overlooked requirement is the T1135 form:

  • Applies to US assets owned by non-residents at death

  • Basic exemption for non-residents: only US$60,000

  • Canada-US Tax Treaty provides access to prorated exemption

Strategic Planning Tips

  • 1

    Consider ownership structure carefully before purchasing

  • 2

    Make the net income election for rental properties

  • 3

    Apply for FIRPTA withholding certificate before selling to reduce withholding

  • 4

    Track all expenses to maximize adjusted cost base

  • 5

    Consult with cross-border tax specialists experienced in both systems

Legal Disclaimer

IMPORTANT: Ping Hsu is not a certified accountant or tax professional and cannot provide tax planning advice. The information in this article is shared for educational purposes only and does not constitute professional tax or legal advice.

Cross-border taxation is complex and constantly changing. Every investor’s situation is unique, and tax implications can vary based on many factors including residency status, income level, and ownership structure.

Before making any investment decisions or tax filings related to US real estate, please consult with a qualified cross-border tax accountant or tax attorney who specializes in Canada-US taxation.

This article provides a general overview to help you understand some basic concepts, but should not be relied upon for specific tax planning or filing decisions.

Ready to explore cross-border investment opportunities with Property Hustlers? Contact us today to learn how our VAULT strategy can help you build wealth through US real estate.

https://propertyhustlers.io/application-optin