Ontario Landlord with Oregon 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 Ownership: A Canadian (Ontario) Resident's Tax Guide

If you own rental property in Oregon as an Ontario resident, you're subject to tax rules from three separate tax authorities: Canada Revenue Agency (CRA), the US Internal Revenue Service (IRS), and the State of Oregon Department of Revenue. Understanding how these systems interact is crucial to minimize your tax burden and stay compliant.

This guide covers the essential tax obligations, filing requirements, and strategic considerations for your cross-border rental situation.

Why This Combination Matters

Oregon and Ontario have fundamentally different tax structures that directly affect your rental income:

• Ontario: You're a Canadian resident for tax purposes. Canada taxes worldwide income, including US rental property.
• Oregon: You're a non-resident for Oregon state purposes. Non-residents must file Oregon state returns and pay Oregon income tax on Oregon-source income.
• US Federal: You're a non-resident alien for federal purposes unless you've elected US resident status. This determines your withholding obligations and filing requirements.

The result: your rental income is taxable in all three jurisdictions. Without proper planning, you could face double taxation. Fortunately, Canada's foreign tax credit mechanism is designed to prevent this, but you must file correctly.

CRA Obligations for Ontario Residents

Reporting Rental Income

You must report all US rental income on your Canadian tax return, converted to Canadian dollars using the Bank of Canada annual average exchange rate. For 2025, use 1 USD = 1.3978 CAD for income received during 2025.

Form T776 (Statement of Real Estate Rentals) is your primary filing document:

• Report gross rental income in CAD
• Deduct legitimate rental expenses (mortgage interest, property taxes, insurance, maintenance, utilities you pay, property management fees, condo fees)
• Do NOT deduct the full mortgage principal — only interest is deductible
• Calculate net rental income or loss
• Report capital cost allowance (CCA/depreciation) if claimed

Form T1135 (Foreign Investment Property)

If your Oregon property had a cost basis exceeding CAD $100,000 at any time during the year, you must file Form T1135.

• Report the property's fair market value in CAD as of December 31
• Specify the property address and type (residential rental)
• Failure to file can result in a $2,500 penalty plus potential loss of capital loss carryforwards

Foreign Tax Credit (Form T2209)

This is your primary tool to avoid double taxation:

1. Calculate total tax paid to the US (federal + Oregon state withholding, or actual tax owing)
2. Calculate total tax paid to Oregon state
3. Report these amounts on Form T2209 (Federal Foreign Tax Credit)

The federal credit is limited to the lesser of:

• Tax paid to the US
• Canadian tax on that foreign income

Example: If your net US rental income is CAD $10,000 and you pay USD $2,000 (CAD $2,720) in US taxes, you can claim a foreign tax credit for the lesser amount.

Oregon state taxes are not eligible for the federal credit; instead, they are claimed as a provincial credit on your Ontario tax return (Schedule ON(428) – Ontario Overseas Tax Credit).

IRS Obligations for Non-Resident Aliens

Obtaining an ITIN

Before filing any US tax return, you must obtain an Individual Tax Identification Number (ITIN) from the IRS.

• Apply using Form W-7 (Application for IRS Individual Identification Number)
• You can apply simultaneously with your first return or submit Form W-7 separately
• Processing time: 6–8 weeks
• Without an ITIN, the IRS cannot process your return

Form 1040-NR and Schedule E

As a non-resident alien, file Form 1040-NR (US Income Tax Return for Nonresident Alien Individuals), not Form 1040:

• Schedule E (Supplemental Income and Loss) reports your rental property details
• Report gross rental income and deduct all ordinary and necessary rental expenses
• Expenses include: property taxes, mortgage interest, insurance, repairs, maintenance, property management fees, utilities (if you pay), HOA dues, advertising costs, and depreciation
• Do NOT deduct personal use expenses or capital improvements (these increase basis instead)

Making the Section 871(d) Election

Here's where strategic tax planning matters. Non-resident aliens typically face a 30% federal withholding on gross rental income. However, you can elect to be taxed on net rental income instead under Section 871(d).

How it works:

• Without the election: 30% withholding on gross rents (extremely punitive)
• With the election: You're taxed on net income after deductions, similar to a resident

Filing the election:

• Include Form 8288-B (Certificate of Withholding on Dispositions by Foreign Persons) with your first Form 1040-NR, or
• Attach a statement stating you're electing under IRC Section 871(d)
• The election is effective for the year filed and all future years unless revoked

Practical impact: If your gross rent is USD $24,000 and expenses are USD $12,000 (50% ratio), the election reduces your taxable income from USD $24,000 to USD $12,000—a significant advantage.

Form W-8IMY or Notification

Once you've made the Section 871(d) election, provide written notification to your property manager or rental agent so they understand your election status. Some property managers may request Form W-8IMY (Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or U.S. Branch) or a letter confirming your ITIN and election status.

Filing Deadline

File Form 1040-NR by June 15, 2025 (not April 15—non-residents get an extra two months). Extensions are available by filing Form 4868 by June 15.

Oregon State Tax Obligations

Non-Resident Filing Requirement

Oregon requires non-residents to file Form OR-40 (Oregon Individual Income Tax Return) if they have Oregon-source income exceeding the filing threshold.

For 2024 (used for 2025 filing):

• Single filers: approximately USD $4,700 annual income threshold
• Married filing jointly: approximately USD $9,400

Most rental income exceeds this threshold, so filing is required.

Oregon Income Tax Rate

Oregon's top marginal tax rate is 9.9% on net income. As a non-resident, you report only Oregon-source income (your rental property income) on the Oregon return.

• Oregon allows federal deductions as a starting point
• Oregon does not recognize the Section 871(d) election—you must pay tax on net rental income regardless
• Property taxes paid on your Oregon property are deductible on the Oregon return

Oregon Form OR-40-N (Non-Resident)

Use Form OR-40-N if you're a non-resident for Oregon purposes:

• Report federal taxable income from Schedule E (your rental property)
• Apply Oregon adjustments (Oregon recognizes most federal deductions)
• Calculate tax at 9.9% (or graduated rates if Oregon's brackets apply)

Oregon Property Tax Obligation

Separately, Oregon charges property tax at an average effective rate of 0.97% on the property's assessed value.

• This is paid directly to Marion County (or the county where your property is located)
• Not withheld; you receive a property tax bill annually
• This expense is deductible on both your US federal return (Form 1040-NR) and Oregon return

Withholding and NR6 Forms

Part XIII Withholding (CRA)

If you don't file an NR6 (Undertaking to File an Income Tax Return) with the CRA, Canadian rental income is subject to 25% withholding on gross rent.

• Your property manager must withhold 25% of each rent payment
• This significantly reduces cash flow
• File NR6 before the rental season begins to avoid withholding

NR6 Filing

To claim exemption from Part XIII withholding, file Form NR6:

• Certify that you'll file a Canadian tax return
• Submit before rental income is paid
• Withholding applies only if NR6 is not on file; once filed, it remains valid unless revoked

Without NR6, the 25% withholding is not a tax—it's an advance payment. You'll recover the excess when filing your Canadian return and calculating your foreign tax credit.

Selling the Oregon Property: FIRPTA Considerations

If you sell your Oregon rental property, be aware of FIRPTA (Foreign Investment in Real Property Tax Act):

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.