Rental Income Across the Border: The Gross Withholding Trap on Both Sides and the Election That Fixes It

Short version: Section 871(d) Election: U.S. Rent Taxed on the Net

A rental property in the other country is taxed twice by design: the country where the property sits taxes the rent because the property is there, and the owner's country taxes it because the owner is there. The treaty resolves the overlap with a foreign tax credit in the residence country. What catches owners is the default rule in the property's country: without an election, tax is withheld on gross rent at 30% (US) or 25% (Canada) with no deductions, and the withholding is final. The election to be taxed on net rent at graduated rates is the single most valuable filing for a cross-border landlord.

Full guides: Renting Out US Property as a Canadian: the 30% Gross Withholding Default and the Net Election That Replaces It · Renting Out Your Canadian Home After Moving to the US: the 25% Withholding, the NR6 Fix, and the Section 216 Return

Key takeaways

• Canadian owning US property: default is 30% US withholding on gross rent, final. The section 871(d) election (made on a 1040-NR) treats the rental as effectively connected income, allows deductions, and taxes net income at graduated rates. Depreciation is mandatory. State tax applies in most states. Canada taxes the net rent on Form T776 with a foreign tax credit, and the property is reported on T1135.
• US person owning Canadian property: default is 25% Part XIII withholding on gross rent, final. Form NR6 (filed before the first rent payment of the year, with a Canadian agent) switches withholding to net, and a section 216 return reports the net income at graduated rates. The US taxes the net rent on Schedule E with a foreign tax credit; depreciation is mandatory.
• Sale: a Canadian selling US property faces FIRPTA withholding; a US person selling Canadian property faces Section 116 clearance. Depreciation recapture applies in the property's country.
• Short-term rentals (Airbnb-style) can be treated as a business rather than passive rental, with different deduction, self-employment, and withholding rules.

Canadian owning US rental property

Default. The tenant or property manager withholds 30% of gross rent and remits it on Form 1042; the owner receives a Form 1042-S and has no further US filing. On a $30,000 gross rent with $22,000 of expenses, that is $9,000 of tax on $8,000 of net income.

Election. The owner files a 1040-NR with a statement electing under section 871(d) to treat the rental income as effectively connected with a US trade or business. Net rental income (rent less mortgage interest, property tax, insurance, management, repairs, and mandatory depreciation) is taxed at graduated rates. The election is made once and continues; the property manager can stop withholding on receipt of a Form W-8ECI. On the same $30,000 of rent, tax on $8,000 of net income (less depreciation, often zero or a loss) is a few hundred dollars or nothing.

Depreciation. US depreciation of the building (27.5 years residential) is mandatory in the sense that basis is reduced by allowable depreciation whether or not claimed; on sale, the recapture is taxed at up to 25%. Claim it.

State. Florida and Texas have no income tax on the rent; Arizona, California, and most others do, with their own non-resident returns.

Canada. The net rent is reported on Form T776 in Canadian dollars (the CRA accepts the annual average rate for income items), with Canadian rules for expenses and optional capital cost allowance. The US tax (federal and state) is claimed as a foreign tax credit on Form T2209. The property is reported on Form T1135 if the cost of foreign property exceeds $100,000 CAD.

US person owning Canadian rental property

Default. The tenant or agent withholds 25% of gross rent and remits it monthly; the owner receives an NR4 and has no further Canadian filing.

NR6 and section 216. The owner appoints a Canadian resident agent and files Form NR6 before the first rent payment of the year (or before January 1), undertaking to file a section 216 return within six months of year-end. On CRA approval, the agent withholds 25% of net rent (rent less expected expenses) instead of gross. The section 216 return reports net rental income at graduated rates (federal plus a 48% surtax for non-residents rather than provincial tax), with capital cost allowance optional. If the section 216 return is not filed on time, the agent is liable for the difference between gross and net withholding.

US. The net rent is reported on Schedule E in US dollars with mandatory depreciation (30 years for foreign residential property placed in service after 2017, 40 years if earlier, under the alternative depreciation system). The Canadian tax is claimed as a foreign tax credit on Form 1116 in the passive basket. The Canadian bank account used for the rental is on the FBAR.

Short-term rentals

A property rented for average stays of seven days or less, or with substantial services, is not a passive rental activity in the US; income can be trade-or-business income, and for a non-resident it can constitute a US trade or business without the 871(d) election. Platform withholding (Airbnb and Vrbo withhold 30% for foreign hosts without a Form W-8ECI) follows the same logic. Canada treats short-term rental income as business income in some circumstances, with GST/HST registration required above $30,000 of revenue.

Worked example

A Toronto couple owns a Naples condo renting for $36,000 a year with $24,000 of expenses and $9,000 of depreciation.

• Without the election. $10,800 of US withholding on gross rent; final. Canada taxes $12,000 of net rent (before CCA) with a foreign tax credit limited to the Canadian tax on that income, about $6,400; the other $4,400 of US tax is unrecoverable.
• With the election. 1040-NR reports $3,000 of net income after depreciation; US tax roughly $300; no Florida tax. Canada taxes $12,000 of net rent with a $300 credit; about $6,100 of Canadian tax.
• Saving. About $10,500 a year.

Official sources

"If an NRA owns or holds in interest in real property located in the U.S. and holds the property for the production of income, then the NRA can elect under Internal Revenue Code (IRC) 871(d) to treat all income from U.S. real property as effectively connected income with the conduct of a trade or business in the U.S." — Internal Revenue Service, Nonresident aliens – Real property located in the U.S., https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-real-property-located-in-the-us

"If you received income from renting real estate or other real property, you have to file a statement of income and expenses." — Canada Revenue Agency, Rental Income (T4036), https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html

"If you receive rental income from real or immovable property in Canada, the payer or agent (such as the property manager) must withhold non-resident tax of 25% on the gross rental income paid or credited to you." — Canada Revenue Agency, Rental income and non-resident tax: Filing and reporting requirements, https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/rental-income-non-resident-tax/filing-reporting-requirements.html

Practitioner note

The election is the whole file. A Canadian with a Florida rental who has never filed a 1040-NR has been paying 30% of gross rent for years and can recover only the last three by filing late elections; a US person with a Toronto condo who never filed an NR6 has been having 25% of gross withheld with no way to recover the excess for years the section 216 return was not filed. We file the election before the first rent cheque.

See also: Planning a full move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the section 871(d) election and 1040-NR, or the NR6 and section 216 return, plus the home-country return with the foreign tax credit. See cross-border pricing or book a call.