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CSA TRAVEL INFORMATION GUIDE
If you are considering renting out your home, no matter for how long a duration, it is important to
check with your home insurance broker to ensure that you have adequate and appropriate insurance
coverage. Most homeowner insurance policies do not provide coverage in cases of a third-party rental
arrangement. It may be necessary to change or upgrade your coverage.
In the case of living in a planned or gated community, it is also important for you to check any
resident association or park by-laws and regulations to determine if renting out your unoccupied
property to other individuals – family members or complete strangers – is allowed.
Once the matter of home insurance and any applicable park/community by-laws or regulations have
been investigated, a further matter to consider is that income derived from renting out your property
is subject to income tax, as any other form of income, in either Canada or the United States.
As a Canadian resident who spends part of the year in the United States, you are considered either
a resident alien or a non-resident alien for the purpose of U.S. taxation by the U.S. Internal Revenue
Service (IRS). Resident aliens are generally taxed in the United States on income from all sources
worldwide. In contrast, non-resident aliens are generally taxed in the U.S. only on income from U.S.
sources.
That U.S. income is divided into two categories:
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Income that is effectively connected with a trade or business in the U.S. (including income from
the sale or exchange of U.S. real property); and
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Income that is not effectively connected with a trade or business in the U.S., but is from U.S.
sources (including interest, dividends, rents and annuities).
Effectively connected income, after allowable deductions, is taxed at the same rates that apply
to U.S. citizens and residents. Income that is not effectively connected is taxed at 30% or a
lower treaty rate.
Rental income is not effectively connected in the United States. If you rent out your U.S.-based
property, you should be aware that a withholding tax of 30% normally applies to the gross amount
of any rent paid whether you are physically in the United States or back in Canada at the time of the
payment. Unlike withholding taxes on interest and dividends, this tax is not reduced by the Canada-
U.S. tax treaty.
One way to possibly avoid the 30% gross withholding tax is to file a U.S. tax return and elect to pay
tax on net rental income. Under the U.S. Internal Revenue Code, you can elect to treat rental income
as income that is effectively connected with the conduct of a U.S. trade or business. If you make this
election, you are taxed on the net income. You can claim expenses related to owning and operating
the rental property during the rental period, including a mandatory depreciation charge. In this
case, you may be eligible to receive a refund for any taxes withheld, to the extent of the withholding
amount exceeds the tax payable.
If you have not made an election to treat your U.S. rental property income as effectively connected
with a U.S. trade or business, then tenants or management agents have to withhold the 30% non-
resident tax from the gross rent and send it to the IRS using form 1042 Annual Withholding Tax Return
for U.S. Source Income of Foreign Person’s and IRS form 1042-S Foreign Person’s U.S. Source Income
Subject to Withholding.
If you decide to make the election, to avoid the tenant or management agent from making the
30% withholding, you must provide the tenant or agent with IRS formW-8ECI Certificate of Foreign
Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United
States.