Canadian Rental

Today TaxMama hears from John in the TaxParlor who says, “I had a client ask how to claim a rental in Canada. He got it this year 2006. He pays property tax and mortgage interest and has some other costs. He also said it was a time share. He is not using it and only rents it out. Where would I go to learn about this type of situation? Again thank you for all of your help. You are a lifesaver.”

Hi John,

Where would you go to learn about this kind of situation? Good question. I’ll have to think about that. Meanwhile, here are your issues, as I see them:

1) Typically, timeshares are bought in two week periods or less. The tax code allows us to rent our home or vacation home for 14 days or less tax free. Does that apply to homes in Canada? Sure. I don’t see why not.

In fact, when it comes to the deductibility of charitable contributions, US taxpayers may deduct payments to approved US charites – and those in Canada and certain other countries. So, I think activities in Canada are interchangeable with those in the US. (No doubt, someone will tell me I am wrong….yes, Roger?)

2) If the income is taxable (i.e. he has more than two weeks worth of income), he’ll be paying tax in Canada. Be sure to pick up the foreign tax credit. BUT, may you pick up a foreign tax credit for any part of the income with was not taxed in the US? I think you’d have to pro-rate that, the same way you pro-rate investment fees against taxable and non-taxable income.

3) If the income is taxable, can you depreciate a time share property? And since you don’t own any of the land, just part of the building for part of the time…can you depreciate the full amount?

OK, some sources – for depreciation of property used outside the US, IRS Publication 946 – Depreciation – says to use ADS -SL
http://www.irs.gov/publications/p946/ch04.html

The US – Canada Tax Treaty can be found in IRS Publication 597
http://www.irs.gov/publications/p597/index.html

And remember, you can find answers to all kinds of questions about rentals outside the US and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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