Ontario Landlord with Alabama 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 Taxation for Ontario Residents: The Alabama Case

Owning rental property in Alabama as an Ontario resident creates a unique tax situation that involves compliance with two countries' tax authorities. The Canada Revenue Agency (CRA), US Internal Revenue Service (IRS), and Alabama Department of Revenue all have claims on your rental income. Understanding these overlapping obligations—and the credits available to you—is essential to minimize your overall tax burden and avoid penalties.

This guide walks you through the specific requirements for Ontario landlords with Alabama rental property.

Why This Combination Matters

Alabama has no state corporate income tax but does impose a 5% individual income tax on residents and non-residents earning Alabama-source income. As an Ontario resident, you're a non-resident for Alabama tax purposes, which triggers a separate state filing requirement. Meanwhile, the CRA taxes your worldwide income, including US rental profits.

The good news: Canada has a tax treaty with the United States (the Canada–US Tax Treaty) that prevents double taxation on the same dollar. However, you must file correctly in both jurisdictions and claim foreign tax credits in Canada to benefit from this protection.

CRA Obligations for Ontario Landlords

Filing Form T776

You must report all rental income from your Alabama property on Form T776 (Statement of Real Estate Rentals), filed with your annual Canadian tax return (Form T1 General).

Report the following in Canadian dollars (using the Bank of Canada annual average exchange rate; for 2025, 1 USD = 1.3978 CAD):

• Gross rental income (from Schedule E filed with the IRS)
• Allowable expenses: mortgage interest, property taxes, insurance, utilities, repairs, maintenance, capital cost allowance (CCA)
• Net rental income or loss

The CRA does not allow you to deduct US income tax paid directly from gross income on T776. Instead, you claim a foreign tax credit on Schedule 1 (discussed below).

Form T1135: Foreign Property Reporting

If the fair market value of your Alabama property exceeds CAD $100,000, you must file Form T1135 (Foreign Income Verification Statement) annually with your T1 return.

Report:

• Description of the property
• Country (United States)
• Fair market value in Canadian dollars at year-end
• Income generated (in Canadian dollars)
• Any taxes paid in the US (in Canadian dollars)

Failure to file T1135 incurs a penalty of CAD $500 for first-time non-compliance, increasing to CAD $2,500 for subsequent years.

Foreign Tax Credit (Schedule 1)

To avoid double taxation, claim a non-business foreign tax credit for US income taxes paid on your Alabama rental income.

On Schedule 1 (Line 405), claim:

• US federal income tax withheld or paid on your rental income
• Alabama state income tax (5%) paid

The credit is limited to the Canadian tax otherwise payable on that income, and the calculation uses prescribed rates and specific rules. Most Ontario landlords benefit significantly from this credit because US tax rates are often lower than Ontario marginal rates.

Key point: Track every US tax dollar paid. You'll need documentation from your IRS filings and Alabama state return.

IRS Obligations for Non-Resident Aliens

Obtain an ITIN

As a Canadian non-resident alien, you need a US Individual Taxpayer Identification Number (ITIN), not a Social Security Number.

Apply using Form W-7 (Application for IRS Individual Taxpayer Identification Number) before filing your US rental income return. You can file this simultaneously with your first US tax return. Processing takes 4–6 weeks.

File Form 1040-NR or 1040-NR-EZ

Non-resident aliens earning US rental income must file Form 1040-NR (US Nonresident Alien Income Tax Return) or the simplified 1040-NR-EZ (if eligible).

Filing deadline: June 15, 2025 for the 2024 tax year (non-resident aliens get an automatic extension to June 15). Estimated tax payments are due April 15.

Schedule E: Rental Property Income

Report your Alabama property details on Schedule E (Supplemental Income or Loss), attached to Form 1040-NR.

Include:

• Address of the property (Alabama address)
• Days rented and days personal use
• Gross rents
• Deductible expenses: mortgage interest, property tax, insurance, repairs, depreciation, utilities
• Net income or loss

Section 871(d) Election (Critical)

This is the most important tax planning tool for non-resident rental property owners.

Under Section 871(d) of the US Internal Revenue Code, you can elect to be taxed on net rental income (after deductions) at regular graduated rates instead of 30% gross withholding tax.

Without the election: The IRS assumes 30% of gross rents should be withheld, which is devastating when you have legitimate deductions.

With the election: You report actual net income and pay tax only on that amount.

File Form 8288-B (Statement of Withholding on Dispositions by Foreign Persons) or include a clear statement with your Form 1040-NR election under Section 871(d). This election is permanent unless revoked.

Example: You collect CAD $30,000 (USD $22,000) in gross rents. Without the election, 30% (USD $6,600) is withheld. With deductions of USD $8,000, your net is USD $14,000—but you've overpaid withholding. The 871(d) election allows you to report only the USD $14,000 net income and recover the excess withholding as a refund.

Part XIII Withholding Prevention

The CRA can impose a Part XIII withholding tax of 25% on gross rental income if you haven't filed an NR6 form (Undertaking – No Dependant in Canada) with CRA.

Before collecting rents, file Form NR6 with the CRA to designate an agent (often your property manager) authorized to deduct and remit Part XIII tax, or to confirm you'll report the income on your Canadian return.

Without NR6 filed, your US property manager may be legally required to withhold 25% of gross rents and remit to CRA—a significant cash flow problem.

Alabama State Income Tax Obligations

As a non-resident earning Alabama-source income, you must file Alabama Form 40 (Individual Income Tax Return) annually.

Filing Requirements

• Filing deadline: April 15, 2025 for tax year 2024
• Tax rate: 5% on Alabama-source rental income
• Allowable deductions: Same as federal (mortgage interest, property taxes, insurance, repairs, depreciation)

Key Steps

1. Convert gross Alabama rental income to USD (if you collected in CAD)
2. Calculate allowable deductions in USD
3. Apply 5% Alabama rate to net income
4. File Form 40 with Alabama Department of Revenue

Alabama offers no foreign tax credit, so you cannot offset Canadian taxes. However, you can use Alabama income tax paid as part of your federal foreign tax credit calculation on your US return, reducing your US federal liability.

Selling the Property: FIRPTA Basics

If you sell your Alabama property, the Foreign Investment in Real Property Tax Act (FIRPTA) requires the buyer to withhold 15% of the gross sale proceeds and remit to the IRS.

You must file Form 8288 (US Withholding Tax Return for Dispositions by Foreign Persons) to report the sale and withholding. This filing is separate from your standard tax return.

The withholding is a credit against your US capital gains tax, calculated on Form 1040-NR Schedule D (Capital Gains and Losses). Plan ahead: if the property has appreciated significantly, you may owe additional tax beyond the 15% withheld, or you may be entitled to a refund.

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.

Key Deadlines for Ontario Landlords (2024 Tax Year)

| Deadline | Form/Task | To Whom | |----------|-----------|---------| | April 15, 2025 | Form 1040-NR (US tax return) | IRS | | April 15, 2025 | Alabama Form 40 (state return) | Alabama Dept. of Revenue | | June 15, 2025 | Non-resident extension deadline | IRS | | June 15, 2025 | Estimated tax (Q2) | IRS | | June 2, 2025 | Canadian tax return (T1, T776, T1135, Schedule 1) | CRA |

*Note: Extend