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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7361
Experience:  15years with H & R Block. Divisional leader, Instructor
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I got great assistance from an American Tax expert on this

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I got great assistance from an American Tax expert on this yesterday, but I really think I need the thoughts of a Canadian tax expert. My spouse and I bought two rent producing properties in the USA this year. We are both Canadian, and Canadian residents. At this time, after expenses, we will make a small profit on the rents. We definitely want to avoid having 30% gross withheld for the IRS. Does the USA-Canada Treaty provide for an exemption of this type of income...and if so what is the article number? Failing which...is the best bet to file a W-8ECI and file the Election that this income is effectively connected with a business in the USA?
Submitted: 3 years ago.
Category: Tax
Expert:  Robin D. replied 3 years ago.

Robin D :

Hello and thank you for using Just Answer.
The sourcing rules determine the taxation and the treaty agreement between Canada and the US. Rental income is sourced according to where the rental property is located. Since your rental property is located in the US it is US source and the tax is not covered by any treaty agreement.


The Canada-U.S. tax treaty no longer provides overriding provisions applicable to real estate rental income, thus both country’s domestic tax laws apply unmodified.


 


Under U.S. domestic tax law, rental income derived from U.S. real estate is subject to a 30% withholding tax imposed on gross rents unreduced by expenses or losses. However, U.S. law allows the foreign investor the option of filing U.S. tax returns and electing “net basis” taxation and graduated tax rates under the regular or alternative minimum tax rules (a net rental loss may not reduce other income). Once the election is made, it can only be changed with IRS consent and the election applies to all of the investor’s U.S. rental activities. Until 1983, the Canada-U.S. treaty provided a reduced tax rate of 15% instead of 30% and also provided a more flexible net-basis election.
By claiming the US rental is effectively connected you will not have the withholding but you will be required to file a US 1040NR rentrun and reportthe US rental.

Customer:

Hi, and thanks. I've spent all morning speaking with the IRS and I'm more confused than ever. We're happy filing in the USA and paying the tax on the net rental income....but we want to avoid the 30% gross withholding tax. The last guy I spoke to said the W-8BEN will do this in our situation of rental income....but I'm not so sure. In Section 10 of that Form...I have to indicate the Article Number of the US-Canada Treaty setting a 0% withholding of rental income. Is there such an Article? Thanks, again.

Robin D :

You would site Article 6

Robin D :

The W8ECI form does not need to be filed with the IRS by the withholding agent; however, an ITIN is required in order for the form to be valid. (ITINs can be obtained when the first nonresident income tax return is filed. A form W-7 is attached to this nonresident return by you, and the form requests an ITIN be assigned to you as a nonresident taxpayer)

Customer:

I'm sorry Robin, I'm just not getting it. Why is this IRS guy telling me W-BEN applies to our situation? Thanks again.

Robin D :

The W8 (no matter which one is used) is for the withholding agent to cover themselves for not having collected the tax upfront. The IRS would require that withholding agent to pay the tax if they did not get it from the nonresident alien. Fill out the W8 ECI form and then apply for your ITIN so you can file the 1040NR return on the rental.
The W8 ECI is for NRAs that which to make their rental effectively connected the the US as business so the withholding is not applied. Turn in the W8ECI (the instructions on the BEN even explain this).

Robin D :

My guess as to why the IRS person said another is probably as good as yours

Robin D :

You know you can always come back here even after you click ACCEPT. Thanks again

Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 7361
Experience: 15years with H & R Block. Divisional leader, Instructor
Robin D. and 6 other Tax Specialists are ready to help you

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