David A. Altro is a frequent contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read David’s answer to the second question.
Tax strategy: Rental income from U.S. must be reported
Wednesday, March 20, 2013
Florida rental properties and the calculation of Old Age Security benefits were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.
Q: A lot of my friends and relatives have purchased condos in Florida after the housing crash. None of them are declaring their U.S. rental income and they don’t believe/understand the consequences of not doing so. What could happen?
A: Cross-border expert David Altro, of Altro & Associates, says the rules are clear: A Canadian resident who owns U.S. rental property is obligated to report the income to the Internal Revenue Service (on IRS Income Tax Return for Non-Resident Form 1040 NR – link opens PDF). The income must also be reported on Canadian tax returns; any tax paid in the U.S. would normally qualify as a foreign tax credit on the Canadian return.
If you don’t file and the IRS or Canada Revenue Agency finds out, you may be digging into your pocket for fines and interest on top of any taxes due.
Q: I am applying for Old Age Security and have resided in Canada for 20 years, but previously I contributed for more than 20 years to the social security system of Latvia, which has a social security agreement with Canada. Will I be credited for those years?
A: No. The agreement between the countries only takes into account your Latvian time if you need those years to meet the minimum requirement for Old Age Security, which is 10 years of residence after age 18 for persons living in Canada or 20 years of residence after age 18 for persons living abroad.
If you had lived here, say, just three years, your time in Latvia may have counted to bring you up to the 10-or 20-year residence requirements; you would, however, be paid only 3/40ths of the full OAS pension, since the amount would be based exclusively on your actual years of residence in Canada.
As a general rule, international social-security agreements do not increase the amount of benefit to which an individual is entitled; they merely establish eligibility. To qualify for maximum OAS (currently $546.07 a month, starting at age 65), you must have lived here at least 40 years after age 18; otherwise, you’ll get 1/40th of the full pension for every year of residence in Canada. With 20 years here, you should be eligible for 20/40ths of the maximum, or about $273 a month. Note that you might also be eligible for a benefit from Latvia based on the 20-plus years of insurance in the Latvian system.
Q: We have just under $400,000 in investments, and a line of credit on which we owe about $20,000. Should we cash in some investments or try to pay off the line of credit at a rate of $1,000 a month?
A: At $1,000 a month, it’ll take you almost two years to pay off, and the interest meter will be ticking the whole time (with rates possibly headed higher). Why not simply cash in some investments, especially with stock markets on a roll, and shed that debt, which isn’t benefiting you in any way? If you sell an investment that’s hardly budged, you won’t even have a taxable capital gain.
The Gazette invites reader questions on tax, investment and personal finance. If you have a query you’d like addressed, send it to Paul Delean, Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1 or to by email to firstname.lastname@example.org