Many Canadians move to the United States for studies, a job, or business. The move is temporary or permanent. And if you are unsure how long you will live in the United States, it becomes difficult to decide what to do with your Canadian home. You have three options:

• Rent it and pay tax in both Canada and the United States.
• Sell it and claim the Principal Residence Exemption before you file your Canada exit tax return.
• Leave it vacant and use it as a vacation residence if you return to Canada.

Each of the three options has different financial implications and tax considerations. Moreover, each family’s situation is different, which can affect their decisions.

How Taxation Works for Canadians Living in the US

When you live in the United States, you have to report worldwide income and pay tax on it. This also includes rental income and capital gains from the rent and sale of foreign properties. As the rental income is earned in Canada, you have to pay tax in Canada. It means the rent is taxable in both countries.

Thankfully, Canada has a tax treaty with the United States that allows a foreign tax credit (FTC). To avoid double taxation, the treaty allows you to deduct the tax paid in Canada as an FTC from your U.S. tax liability. So if you paid $10,000 in taxes to the Canada Revenue Agency (CRA) and your U.S. tax liability is US$50,000, you can deduct $10,000 (convert it into U.S. dollars), reducing your U.S. tax liability.

Nevertheless, you have to calculate two income tax returns, one for Canada and one for the United States.

This is how taxes generally work for foreign income earned by U.S. residents. But taxes on property transactions are complex, and the layer of different tax jurisdictions adds to the complexity. The good news is a professional tax consultant can help you avoid double taxation by calculating Canadian and U.S. taxation and claiming FTC.

Note that this article will only touch base on how taxes work. Every individual’s financial situation is different. Their tax calculation will change as per their situation.

Long-Term Rental vs. Short-Term Rental

Let’s take the scenario where you rent your principal residence in Canada. You have two options:

• Long-term rental, which comes under rental income
• Short- term vacation rentals, which come under income from business

Your income reporting will change depending on how you rent the property, and different rules will apply. You will have to report this income in respective categories in both US and Canadian tax filings. To keep things simple, we will see how long-term rental income needs to be reported in both countries.

How a U.S. Resident Should Report Canadian Rental Income in Canada

If you decide to rent your principal residence in Canada, you need to find a property manager who can screen potential tenants, show the property, and maintain it. Next, file form NR6 “Undertaking to File an Income Tax Return by a Nonresident Receiving Rent from Real or Immovable Property” before the first month of renting the property. After the CRA accepts the form, your property manager will withhold 25% of the rent, remit it to the CRA on your behalf, and issue you NR4. Note that the rental income is before Capital Cost Allowance (CCA).

After the end of the tax year, you file a Canadian income tax return under Section 216 of the Income Tax Act. In that, you report your actual rental income, expenses, and any allowable CCA to calculate your tax liability. If withholding tax is greater than your actual tax liability, the CRA refunds the balance.

How a U.S. Resident Should Report Canadian Rental Income in the United States

After you have filed tax returns in Canada, it’s time to file returns in the US. In the US, rental income is calculated on a cash basis. It means if you collect rent in advance, you will have to report it in the year you received it. The deductible expenses are similar to Canada. As for security deposits, they are not treated as income unless the tenant forfeits them.

When calculating income and expenses, use the average exchange rate, and for any capital improvements in the property, use the exchange rate of that date. Calculate the US tax liability and deduct the tax amount in your Section 216 as FTC. The FTC cannot exceed the US tax liability on Canadian rental income. It is better to consult a tax advisor well-versed in both US and Canadian taxes.

Whether to deduct CCA from your rental income is a strategic decision that should be made after discussing it with a professional tax advisor. CCA might help you reduce your taxable rental income now, but if you want to sell your property, it will be added back when calculating tax in Canada and the US. A professional can work out the math and tell you what works best in your scenario.

Tax When You Sell Your Canadian Property Before Renting It

Another scenario is selling the property. Even in this, you have two options:

• to sell it immediately or
• rent it for a few years and then sell it.

Both options will have different tax implications as the status of your house changes when you rent it. If you sell your house immediately without renting it, you can apply for the principal residence exemption (PRE) on the capital gain from the sale proceeds. There is no dollar limit on this exemption, but you must sell the home in the first two calendar years of your US residence to claim full PRE from Canadian taxes.

In Canada, PRE = number of years house was principal residence + 1 / years of ownership.

That Plus one gives you the extra year from the year you moved to the US to claim PRE.

Even the US has PRE, but the exemption limit is US$250,000 for individuals and US$500,000 for married couples. To be eligible for PRE, you must have resided in the home as the principal residence for at least two years in the last five years before the sale.

When You Sell Your Canadian Property After Renting It

In Canada, if you decide to rent your principal residence before selling it, the usage of the house changes from principal residence to renting. The CRA assumes a deemed disposition of the house at the fair market value (FMV), and your PRE crystallizes there. You have to report the deemed disposition on a nonresident T1 return in the tax year you rent your property. From that point onwards, the adjusted cost base of the house resets to the FMV, and later, when you actually sell the house, the capital gain becomes taxable.

For instance, you bought a principal residence in 2005 for $100,000 and rented it in 2025. At that time, the value of your apartment was $700,000. The $600,000 capital gain is exempt under PRE, and the new adjusted cost base for your house is $700,000. This is called “stepping up” your asset cost base. If you sell the house for $750,000, the $50,000 capital gain will be taxable in Canada.

The U.S. will apply its taxes on the capital gain. You can deduct the capital gain tax paid in Canada from your US tax liability.

Your decision when to rent and sell will determine your tax liability.

Contact Glenn Graydon Wright LLP in Oakville, Ontario to Help You with Cross-Border Taxation

Cross-border taxes are complex. If not planned well, you could end up paying double taxation on the same income. Talk to a professional tax consultant to help you navigate the taxes of both countries and plan your property transactions from a tax perspective. At Glenn Graydon Wright LLP, our accountants and tax advisors can provide services such as filing tax returns in the U.S. and Canada. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and taxation services, contact us by phone today at 905-845-6633, or connect with us online to schedule an initial consultation.