Ontario Landlord with Texas Rental Property

Ontario investors began arriving in Texas in volume around 2020-2022, tracking the same macro logic that drove Florida purchases: GTA yields had compressed to 3.5-4.5% while Austin, Dallas-Fort Worth, and Houston were delivering 6-8% gross on residential SFH and small multifamily. The migration of US tech companies to Austin (Tesla, Oracle, HP Enterprise, Google, Amazon) and the corporate relocation pattern to Dallas (Caterpillar, Goldman Sachs, CBRE) produced rental demand that Ontario investors wanted exposure to.

Texas has no state income tax — your US filing is federal-only. But Texas has the highest property taxes in the nation (effective rates 1.8-2.5% of assessed value), which changes the yield math materially versus Florida. An $80,000 annual rent with $16,000 in Texas property tax is a fundamentally different expense profile than the same rent in Florida at $6,000 in property tax.

CRA Side: Reporting Your Texas Rental Income

T776 Statement of Real Estate Rentals

File Form T776 with your T1 personal return — one T776 per Texas property. Report:

• Gross rental income in CAD, converted at the Bank of Canada annual average (2025 = 1.3978 CAD per USD)
• Deductible expenses in CAD at the same rate: mortgage interest, Texas property tax (fully deductible — the high Texas rate actually becomes a substantial T776 deduction), insurance, repairs and maintenance, property management fees, advertising, accounting

The net flows to T1 line 12600. Ontario's combined top marginal rate is 53.53% (2025). The foreign tax credit on US 1040-NR tax typically absorbs the US liability, with Ontario topping up the residual. Since Texas has no state income tax, your US effective rate on net rental income is federal-only — usually 10-24% graduated — leaving Ontario as the dominant tax jurisdiction.

Critical note on Texas property tax: Unlike income tax, property tax is not deductible on T776 in the year it accrues in some CRA interpretations — it is deductible in the year it is paid. Ensure your CPA claims it in the correct tax year.

T1135 Foreign Income Verification Statement

Texas real estate in any major metro comfortably exceeds the CAD $100,000 threshold. A $350,000 USD Austin property equals approximately C$489,230 at 1.3978. T1135 is mandatory, and the Detailed Reporting level applies above C$250,000.

T1135 penalties:

• Late filing: $25/day, max $2,500
• Failure to file: up to $24,000 per year
• False statement or omission: 5% of unreported property cost, $24,000 minimum
• Failure to file extends CRA's reassessment window from 3 to 6 years

Foreign Tax Credit — T2209

After paying US federal tax via 1040-NR, claim the Federal Foreign Tax Credit (T2209) on T1 line 40500. Ontario's combined rate (53.53%) almost always exceeds the US federal effective rate on rental income (typically 10-24% on net). The FTC absorbs the US tax; Ontario tops up the balance.

IRS Side: US Federal Tax Filing

ITIN — Form W-7

File Form W-7 (with your first 1040-NR) to obtain your Individual Taxpayer Identification Number. Use a Certifying Acceptance Agent to avoid mailing your passport. Processing: 7-11 weeks typical.

Section 871(d) Election — How to Avoid the 30% Withholding Trap

Without the §871(d) election, your Texas rental income is FDAP: the property manager must withhold 30% of gross rent with no expense deductions. On $30,000 annual rent, that is $9,000 withheld upfront.

The Section 871(d) election converts your rental to Effectively Connected Income (ECI), enabling expenses to offset income on Schedule E.

How the election is made:

1. Attach a written statement to your first Form 1040-NR: "Taxpayer elects to treat rental income from US real property as effectively connected with a US trade or business under IRC §871(d)." Include all Texas property addresses.
2. Give your Texas property manager Form W-8ECI — this stops the 30% gross withholding. (Form 8288-B is a FIRPTA withholding certificate used at sale; it has no role in the §871(d) election.)

The election is permanent without IRS consent to revoke and applies to all your US rental income.

Form 1040-NR + Schedule E + Form 4562

• 1040-NR: June 15 deadline for Canadians with no US withholding
• Schedule E: itemize income and deductions per property
• Form 4562: 27.5-year straight-line depreciation on the building portion

Texas-specific Schedule E deductions:

• Property tax (1.8-2.5% effective rate — often the largest single deduction on a Texas rental). Texas property tax includes school district levies, county levies, municipal levies, and special district levies — all bundled on one annual bill, all deductible
• Hail and windstorm insurance (Texas has substantial hail risk, especially DFW metro; windstorm coverage required in Gulf Coast counties)
• HVAC maintenance (Texas summer heat creates extreme wear on air conditioning — repair and annual service contracts are deductible)
• Property management (typical 8-10% of monthly rent in Texas markets)
• HOA fees (common in master-planned communities like Woodlands, Lakeway, Cinco Ranch — deductible)

Texas Property Tax — The Hidden Yield Reducer

Texas makes up for its zero state income tax with some of the highest property tax rates in the US. For Ontario landlords, understanding the Texas appraisal system prevents expensive surprises:

The Texas appraisal cap: Texas limits annual appraised value increases for homestead properties (primary residence) to 10% per year. But investment/rental properties have no cap — the county appraisal district (CAD — not to be confused with Canadian dollars) can increase assessed value by any amount each year.

Practical consequence: if Austin property values surged 30% in 2022 and your rental property was reassessed at market value, your property tax bill jumped proportionally. Texas investors who didn't budget for this found themselves with materially lower actual yields than projected.

You can protest your appraisal each year at the Appraisal Review Board — a right many Ontario landlords are unaware of. If the appraised value exceeds market value, a successful protest reduces your tax bill. Many Texas property owners hire a property tax consultant on a contingency basis (typically 30-40% of savings).

No State Income Tax — The Texas Advantage

Texas is one of nine US states with no personal income tax. Your only US filing is the federal 1040-NR. Compared to:

• California: Form 540NR, state tax 1-13.3%
• New York: IT-203, state tax 4-10.9%
• Arizona: 140NR, flat 2.5% state tax

The absence of a Texas state return reduces annual compliance cost (no separate state filing, no state audit risk) and reduces total US tax — though Texas recaptures this revenue through property tax instead.

The Ontario → Texas Market

Ontario buyers in Texas concentrate by corridor:

• Austin / Greater Austin (Travis County + Williamson County): tech-sector rental demand; cap rates compressed 2021-2022, then corrected. Best entry window was 2023-2025 post-correction. Price range: $400k-$750k SFH typical
• Dallas-Fort Worth (Collin County, Denton County): corporate relocation demand from California (several Fortune 500 HQs relocated DFW 2020-2024). More stable cap rates than Austin; $300k-$600k SFH
• Houston (Harris County, Fort Bend County): energy sector correlation makes it a natural Alberta fit, but Ontario landlords also participate. Lowest entry prices among major Texas metros
• San Antonio: military, healthcare, and tourism economy; most affordable of the major metros; $250k-$400k SFH range

Selling Your Texas Property — FIRPTA

At sale, the buyer's closing agent withholds under FIRPTA:

• 15% of gross sale price default
• 10% if $300,001-$1,000,000 with buyer occupancy certification
• 0% if $300,000 or less with buyer occupancy certification

On a $500,000 sale: $75,000 is withheld and held by IRS until your 1040-NR for the sale year is processed (typically 12-18 months).

To reduce withholding: File Form 8288-B at least 90 days before closing. This is the Withholding Certificate for FIRPTA — not the §871(d) election mechanism. File it to reduce withholding to your actual estimated capital gains tax. Cross-border CPA cost: $500-1,500 typically.

Common Ontario → Texas Mistakes

1. Underestimating Texas property tax. Project 2.0-2.5% effective rate (not 1.0-1.5% as seen in Florida), and budget for potential reassessment spikes on investment property with no appraisal cap.
2. Missing the §871(d) election. 30% gross withholding in year one; difficult to recover without filing a full 1040-NR refund claim.
3. Not protesting the annual Texas appraisal. Many Ontario landlords skip this because it's unfamiliar — but it can save hundreds to thousands per year.
4. Using a US LLC. CRA-IRS entity mismatch causes double taxation and forfeits FTCs. Hold in your personal name unless you have specialized cross-border CPA advice.
5. Skipping T1135. Every Texas property in a major market exceeds C$100,000. The minimum penalty for non-filing is $24,000.
6. Assuming Texas is maintenance-free. Texas hail, heat, and foundation movement (expansive clay soils in DFW) create real maintenance demands. Budget 1-1.5% of property value annually.

Next Steps for Ontario Landlords

• USD/CAD Exchange Rate Database — Bank of Canada annual averages 2010-present
• FIRPTA Calculator — estimate withholding at your projected sale price
• Section 871(d) Decision Tool — confirm whether the election applies to your situation
• Schedule E Calculator — project your US net rental income
• Ontario → Florida Guide — compare with Florida if you're evaluating both markets
• Canadian landlords with US property — overview — broader Ontario-US framework