What is the Difference Between Rental Income in the U.S. vs. Canada?

Rental income is virtually treated the same in both countries in terms of what is taxable as income and what is deductible as an expense; however a difference arises in respect of depreciation.

In Canada, depreciation can only be deducted to bring rental income to zero; however, in the U.S. depreciation is mandatory, even if a loss is created or increased by the deduction. Because depreciation is mandatory in the U.S., even if no taxable income is generated in a tax year, or any real rental activity is present in a tax year, a U.S. tax return should still be filed to record the depreciation applicable to the rental property for that year.

The other difference relating to rental income earned in Canada or the U.S. relates to withholding taxes applicable on the gross rental income. A withholding tax rate of 25% in Canada and 30% in the U.S. is applied to the gross rental income earned by a non-resident; however, in the U.S. a non-resident can elect to treat their rental income as effectively connected income in the U.S. which allows them to avoid the withholding tax all together. Making the election requires the non-resident to file a U.S. tax return to report the net rental income and pay any required income tax at that time.