Renting Out US Property as a Canadian: the 30% Gross Withholding Default and the Net Election That Replaces It

US rental income earned by a nonresident starts life in the wrong tax channel. By default, rents are FDAP income — fixed or determinable annual or periodical — taxed at a flat 30% of gross, collected by withholding at source: the tenant or property manager is the withholding agent, liable for the 30% whether or not they took it. Gross-basis taxation ignores the mortgage, the condo fees, the property tax, and the management — on a typical leveraged rental, 30% of gross exceeds 100% of profit. The exit is the net election under section 871(d): treat the rental as income effectively connected with a US trade or business, taxed at graduated rates on net income, reported annually on Form 1040-NR with a Schedule E. The election is made with the return (a statement attached in the first year), is essentially permanent once made, and — critically for the withholding — is communicated upstream by giving the manager or tenant Form W-8ECI, which switches off the 30% at source. Almost every Canadian landlord should and does elect; the machinery around the election is where the practice points live. US depreciation is effectively mandatory — the eventual sale recaptures depreciation 'allowed or allowable,' so skipping it wastes deductions without avoiding recapture — and runs over the US residential schedule from the property's basis. Losses are governed by the passive activity rules and typically carry forward. State filings apply where the property sits in an income-tax state (Florida and Texas spare the classics; Arizona and California do not). And the Canadian side never left: the same rental reports on the T1 under Canadian rules — different depreciation regime (CCA, optional), different currency — with the US tax credited.

Key takeaways

• Default: 30% of gross rent, withheld and remitted by the payer — the manager or tenant is personally liable for it absent a valid W-8ECI. Casual arrangements with no withholding and no election are the standard audit exposure, and it lands on the agent as much as the owner.
• The net election (871(d)): taxed on net rental income at graduated rates; elected by statement with a timely 1040-NR; binding for future years unless revoked with consent; W-8ECI to the withholding agent stops the gross withholding.
• The 1040-NR needs an ITIN: first-time filers apply on Form W-7, typically with the first return — build the processing time into year one.
• Depreciation is use-it-or-lose-anyway: recapture at sale applies to depreciation allowable even if never claimed, so claim it; the US schedule (27.5-year residential, building value only) differs from Canada's optional CCA, and the two ledgers diverge from day one.
• Filing calendar: 1040-NR due June 15 for nonresidents without US wage withholding; the election's protective value depends on timely filing — the regulations cut off deductions for returns filed too late, which converts procrastination directly into gross-basis tax.
• Canada's side: world income — the rental reports on the T1 in CAD under Canadian computation, US tax credits against Canadian tax on the same income, and the CCA decision runs independently (many owners skip CCA in Canada to keep the eventual Canadian recapture clean while taking mandatory US depreciation).

Setting it up in the first sixty days

Engage the manager and paper the W-8ECI before the first rent cheque; apply for ITINs; open the dual ledger (USD/US-rules and CAD/Canadian-rules); make the election with the first 1040-NR; and calendar both countries' filings. Retrofit is possible — late elections and catch-up returns are a known repair — but the deduction-cutoff rule for very late returns means a landlord who ignored three years of filings can genuinely end up taxed on gross for the early years. The sixty-day setup costs a few hundred dollars of process; the three-year retrofit costs the fees plus, sometimes, the deductions.

Worked example

A Winnipeg couple buys a US$380,000 Phoenix rental: rent US$2,600/month, mortgage interest, taxes, HOA, and management totalling US$2,150/month. Default path: 30% of gross — US$780/month, US$9,360 a year — against true annual profit near US$5,400. Their setup instead: W-8ECI to the manager (withholding stops); ITINs via W-7 with the first return; the 871(d) election statement attached to a timely 1040-NR reporting net income after expenses and US$10,400 of depreciation — a small US loss, carried under the passive rules, US tax nil; Arizona's nonresident return follows the federal numbers. Canadian side: the rental reports on their T1s in CAD showing modest net income (no CCA claimed, by choice); with no US tax paid, no credit is needed, and Canada taxes the profit at their rates. At sale six years later: US recapture applies to the US$62,000 of depreciation taken, FIRPTA withholding applies at closing (its own process), and the Canadian gain computes on their unreduced CCA base — the two ledgers, kept apart since month one, each settle their own country cleanly.

Official sources

"FDAP income is taxed at a flat 30 percent (or lower treaty rate, if qualify) and no deductions are allowed against such income. ... Effectively Connected Income, after allowable deductions, is taxed at graduated rates." — Internal Revenue Service, Taxation of Nonresident Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens

"If you didn't receive wages as an employee subject to U.S. income tax withholding, file Form 1040-NR by the 15th day of the 6th month after your tax year ends. A return for the 2025 calendar year is due by June 15, 2026." — Internal Revenue Service, Instructions for Form 1040-NR, https://www.irs.gov/instructions/i1040nr

Practitioner note

US rentals are a two-regime system where the good regime must be affirmatively chosen, and the choosing has parts — election, W-8ECI, ITIN, timely returns — that fail as a set if any one is skipped. Our onboarding for a new cross-border landlord is the same five documents every time, and our standing warning is the deduction-cutoff rule: the net election rewards the organized and taxes the late on gross, which is the harshest arithmetic in the whole area.

See also: For why every US bank and broker asks Canadians for a W-8BEN, see why every US bank and broker asks Canadians for a W-8BEN; and browse every cross-border tax topic guide, organized by situation · Short version: Rental Income Across the Border: The Gross Withholding Trap on Both Sides and the Election That Fixes It.

Next step

Fairlight prepares the US rental setup — the 871(d) election and W-8ECI chain, ITIN applications, the dual depreciation ledger, state filings, and both countries' returns coordinated. See cross-border pricing or book a call.