New Brunswick Landlord with California Rental Property

⚠️ Note (updated 2026-05-18, body text corrected) — §871(d) election mechanism and Bank of Canada rate corrected in body text below. Supplemental T1135 penalty note (point 3) remains accurate.

1. Section 871(d) election is NOT made via Form 8288-B. The §871(d) election (which converts your US rental income from FDAP — 30% flat withholding on gross rent with no deductions — to ECI, where you deduct expenses on Schedule E and pay tax on net) is made by attaching a written statement to your first Form 1040-NR. Separately, to stop the 30% withholding at source, you provide your property manager with Form W-8ECI (Certificate of Foreign Person's Claim That Income Is Effectively Connected). Form 8288-B is the FIRPTA Withholding Certificate used at SALE only — applied for 90+ days before closing to reduce the default 15% gross-price withholding on a property sale. The two forms apply to entirely different scenarios.

2. 2025 Bank of Canada annual average rate is 1.3978 CAD per USD (not 1.36). Apply consistently across all USD-to-CAD conversions on T776 and T1135.

3. T1135 penalty structure. Late filing: $25/day, max $2,500. Failure to file: up to $24,000/year. False statement or omission: 5% of unreported property cost with a $24,000 minimum penalty. Failing to file T1135 also extends CRA's reassessment period from 3 to 6 years for related tax years.

US Rental Property Tax Guide for New Brunswick Landlords

Owning rental property across the Canada-US border creates a unique tax situation. As a New Brunswick resident earning rental income from California real estate, you're subject to tax obligations in three jurisdictions: Canada (CRA), the United States (IRS), and California. Understanding these overlapping requirements will help you avoid penalties, claim available deductions, and maximize your after-tax returns.

This guide explains what you must file, when, and how to coordinate your filings to minimize double taxation.

Why New Brunswick + California Creates Complex Tax Obligations

New Brunswick is your province of residence for Canadian tax purposes. California is where your rental property is located. This combination triggers:

• Canadian reporting requirements for worldwide income, including US rental profits
• US federal tax obligations on non-resident rental income
• California state tax on rental income earned within the state
• Withholding requirements at the source that differ by jurisdiction
• Foreign tax credits on your Canadian return to offset taxes paid to the US and California

The core issue: rental income earned in California is taxable in all three jurisdictions unless you claim proper exemptions or credits.

Canadian Tax Obligations (CRA)

Filing Form T776: Statement of Real Estate Rentals

You must report all rental income from your California property on your Canadian tax return using Form T776. This form is filed with your personal tax return (Form T1 General).

What to report:

• Gross rental income received (in Canadian dollars, converted at the Bank of Canada annual average rate; for 2025, use approximately 1 USD = 1.3978 CAD)
• All allowable deductions: mortgage interest, property tax, insurance, utilities, repairs, property management fees, depreciation (capital cost allowance), and condo fees if applicable

Key detail: You report gross rental income, not net. The CRA will allow deductions on the T776 itself. Do not net income and expenses before filing.

Form T1135: Foreign Property Reporting

If the fair market value of your California rental property exceeded CAD $100,000 at any time during the tax year, you must file Form T1135: Foreign Income Verification Statement.

This form lists:

• Property address and description
• Cost basis (in CAD)
• Fair market value at year-end (in CAD)
• Country where the property is located

Deadline: File with your personal return by June 15 (for individuals; filing deadline is June 15 if you owe taxes, or October 15 if you don't owe).

Foreign Tax Credit (FTC)

You will pay US federal and California state income tax on your rental income. Canada allows a foreign tax credit on your Canadian return to prevent double taxation.

Claim the FTC on Schedule 1 (Federal Tax) and the provincial tax form for New Brunswick using:

• Form T2209: Federal Foreign Tax Credits
• NB Schedule: Provincial Foreign Tax Credit (check with New Brunswick's provincial tax guide)

The FTC is limited to the lesser of: (1) foreign taxes paid, or (2) Canadian tax on the same income. You cannot claim more in credits than you owe in Canada.

Example: If you pay $5,000 USD in California state income tax but only owe $3,500 CAD on that income in Canada, your FTC is limited to $3,500 CAD. Excess credits may be carried back 3 years or forward 7 years.

US Federal Tax Obligations (IRS)

Obtaining an ITIN

As a Canadian non-resident, you must have a US Individual Identification Number (ITIN) to file US tax returns. An ITIN is required to claim deductions and make the Section 871(d) election (see below).

How to apply:

• File Form W-7: Application for IRS Individual Identification Number with the IRS
• Include required documentation (valid passport, lease agreements, or other proof of property ownership)
• Mail to the IRS address indicated in Form W-7 instructions, or apply through an IRS-approved agent in Canada

Processing typically takes 4–6 weeks. Once issued, your ITIN is yours permanently and does not expire if you file taxes regularly.

Form 1040-NR: US Non-Resident Alien Tax Return

You must file Form 1040-NR (U.S. Income Tax Return for Nonresident Alien Individuals) with the IRS.

Key details:

• Filing deadline: June 15, 2025 (for 2024 tax year; generally April 15 for subsequent years, extended to June 15 if you reside outside the US)
• Who files: Non-residents with US-source rental income
• Where to file: IRS address depends on your situation; see Form 1040-NR instructions

Attach Schedule E (Supplemental Income or Loss) to report:

• Rental property address
• Gross rental income
• Property expenses (mortgage interest, taxes, repairs, depreciation, HOA fees, etc.)
• Net income or loss

Section 871(d) Election: Critical for Deductions

Without this election, the IRS applies a 30% withholding tax on your gross rent. This is extremely unfavorable because it taxes income before deductions.

With Section 871(d) election: You are taxed on net rental income (gross rent minus deductions) at regular graduated tax rates.

How to make the election:

• File Form 8288-B: Statement of Withholding on Dispositions by Foreign Persons (note: this form is also used for the election to be taxed on net income)
• Alternatively, attach a statement to Form 1040-NR stating you elect under Section 871(d)
• Include this with your first US return filing

US federal tax rates (2024) for non-residents on net rental income:

• 10% on the first ~$11,000 USD
• 12% on $11,000–$44,725 USD
• 22% on $44,725–$95,375 USD
• (rates increase at higher brackets)

These rates are far more favorable than the 30% gross withholding.

NR6 Form: Withholding Agreement with IRS

If you are resident in Canada, ask your US tenant's property manager or agent to file Form NR6 (Withholding Agreement Request) with the IRS.

If approved, the IRS may reduce or waive the 30% withholding on your gross rent. This allows the property to remit fewer taxes upfront, improving cash flow. You still file Form 1040-NR to settle your actual tax liability.

California State Tax Obligations

California Franchise Tax Board (FTB) Return

California taxes non-resident rental income at a flat 13.3% marginal rate (technically, California's top rate applies to high earners; however, the effective rate on rental income is typically in the 10–13.3% range depending on total income).

You must file:

• Form 540-NR: California Nonresident or Part-Year Resident Income Tax Return
• Attach Schedule CA (540): California Adjustments

What California requires:

• Gross rental income (in USD)
• All allowable deductions (same as federal: mortgage interest, property tax, repairs, depreciation, etc.)
• Net rental income

California property tax: Separately, you will owe California property tax to the county assessor. Average effective property tax rate in California is 0.76% of assessed value, though Proposition 13 (1978) limits increases. Your property manager or tax advisor can provide exact figures.

Form 592-B: California Withholding on Non-Resident Income

California may require Form 592-B withholding on rental payments if you have not filed previous returns. The withholding is calculated on gross rents.

How to reduce withholding:

• File Form 540-NR early (before year-end, if possible, though this is not always practical)
• Request a waiver or reduction of withholding through the FTB if you expect a refund or low liability
• Work with your property manager to ensure correct withholding amounts are remitted

Selling Your California Rental Property: FIRPTA

If you sell your California rental property, the buyer must withhold 15% of the gross sale price under the Foreign Investment in Real Property Tax Act (FIRPTA).

What this means:

• Buyer holds 15% of sale proceeds in escrow
• Proceeds are remitted to the IRS
• You file Form 1040-NR to claim credits for the withholding and settle your actual tax liability
• If your actual tax is lower than 15%, you receive a

Estimate your FIRPTA withholding at sale: Use the FIRPTA Withholding Calculator to see how much the buyer must hold back at closing, and whether filing Form 8288-B in advance would reduce it.