Tax Considerations for Cross-Border Rental Income

Important Disclaimer

With that critical caveat stated clearly: here's a plain-language overview of the major tax considerations you should be aware of as a Canadian owner earning rental income from a Point Roberts property. The goal isn't to make you a tax expert — it's to ensure you know the right questions to ask your accountant.

US Tax Filing Obligations

As a non-resident alien earning income from US real property, you are generally required to file a US tax return. This applies regardless of whether you have a net profit or loss — the filing obligation exists because you have US-source income.

• Form 1040-NR: The standard US tax return for non-resident aliens with US-source income. Your rental income and expenses are reported here.
• ITIN: An Individual Taxpayer Identification Number is required to file US taxes if you don't have a Social Security Number. Apply using Form W-7.
• Deductible expenses: Management fees, cleaning costs, maintenance and repairs, insurance, property taxes, mortgage interest, utilities, depreciation, and travel costs related to the property may all be deductible. Your tax professional will determine what applies to your situation.
• Depreciation: US tax law allows you to depreciate the cost of the building (not the land) over a set period. This is a significant tax benefit that reduces your taxable income — but it has implications when you sell (depreciation recapture). Your accountant needs to handle this carefully.
• Filing deadline: The US tax year ends December 31, and the filing deadline for non-resident aliens is typically June 15 (with extensions available). Don't miss deadlines — penalties apply.

Canadian Tax Reporting

Canada taxes its residents on worldwide income. That means your US rental income must also be reported on your Canadian tax return — even though you're already reporting it to the IRS.

The mechanism to prevent double taxation is the foreign tax credit. Taxes paid to the US on your rental income can generally be claimed as a credit on your Canadian return, reducing your Canadian tax liability dollar-for-dollar (up to the Canadian tax that would be owed on that income).

1. 1Report your US rental income on your Canadian T1 return, converting to Canadian dollars using the appropriate exchange rate.
2. 2Claim the foreign tax credit (Form T2209) for US taxes paid on the rental income.
3. 3Ensure your Canadian and US returns are consistent — same income, same expenses, same net figure (adjusted for currency conversion). Inconsistencies can trigger audit inquiries in either country.
4. 4Foreign property reporting: If the total cost of your US property exceeds CAD $100,000, you may need to file Form T1135 (Foreign Income Verification Statement) annually with the CRA.

The US-Canada Tax Treaty

The US-Canada Tax Treaty is a bilateral agreement designed to prevent double taxation and resolve tax conflicts between the two countries. For rental property owners, the key provisions relate to:

• Real property income: Under the treaty, income from real property (including rental income) is taxable in the country where the property is located (US). Canada then provides a foreign tax credit for the US taxes paid.
• Capital gains on real property: Gains from selling US real property are taxable in the US (subject to FIRPTA withholding, discussed below). Canada also taxes the gain but provides credit for US taxes paid.
• Treaty benefits aren't automatic: You must properly claim treaty benefits on your tax returns. This isn't a "set and forget" — your tax professional needs to handle this with each filing.

The treaty generally works well for rental property owners — you pay tax in both countries, but the foreign tax credit mechanism prevents paying twice on the same income. The complexity arises in the details: timing differences, currency conversion, and depreciation calculation differences between the two systems.

FIRPTA: What Happens When You Sell

FIRPTA — the Foreign Investment in Real Property Tax Act — is a US law that requires buyers of US real property from foreign sellers to withhold a percentage of the sale price and remit it to the IRS. This isn't an additional tax; it's a prepayment mechanism to ensure the IRS collects tax on the capital gain.

The standard withholding rate is 15% of the gross sale price — not 15% of the gain. On a $400,000 property, that's $60,000 withheld at closing, even if your actual capital gain is much less. You recover the excess by filing a US tax return for the year of sale.

1. 1Reduced withholding: If the sale price is $300,000 or less and the buyer intends to use the property as a primary residence, the withholding rate may be reduced to 0%. Other exemptions and reduced rates exist — your tax professional can advise.
2. 2Withholding certificate: You can apply to the IRS for a reduced withholding amount before closing (Form 8288-B). This requires advance planning — ideally months before the sale.
3. 3Depreciation recapture: If you've been depreciating the property on your US tax returns, the accumulated depreciation may be "recaptured" as taxable income when you sell. This can be a significant and surprising tax bill if not planned for.
4. 4Canadian reporting: The capital gain must also be reported on your Canadian return, with foreign tax credits claimed for US taxes paid on the gain.

Lodging & Sales Tax

Separate from income tax, your rental activity triggers state and local lodging and sales taxes. These are consumption taxes collected from guests and remitted to the taxing authorities — they don't come out of your rental income, but you're responsible for ensuring they're collected and paid.

• Washington State sales tax: Applies to short-term lodging (stays under 30 days)
• Washington State lodging tax: Additional state-level tax specific to overnight accommodations
• Whatcom County lodging tax: Local tax levied by the county on short-term stays
• Platform collection: Airbnb and VRBO collect and remit some taxes automatically in Washington State. Verify which taxes are handled and which require manual filing.
• UBI registration: You need to register with the Washington State Department of Revenue for a Unified Business Identifier — even if platforms handle tax remittance.

At STAY49, we handle lodging tax remittance as part of our management service and help owners complete the necessary registrations during onboarding. This is one less thing for you to manage across the border.

Finding the Right Tax Professional

Not all accountants are equipped to handle cross-border rental income. You need someone with specific experience in US-Canada tax issues, not just a general accountant who "knows a bit about international tax."

• Look for a CPA (US) or CPA/CA (Canada) with demonstrated cross-border experience
• Ask specifically about experience with non-resident rental income, FIRPTA, and Form 1040-NR
• Ideally, find a firm that can handle both your US and Canadian filings — or at minimum, two firms that communicate with each other
• Expect to pay more than you would for a standard personal tax return — cross-border complexity requires expertise, and expertise costs money
• Get a professional engaged before your first rental booking, not after the first tax year has already passed