New legislation now requires you to report certain payments related to rental income from real estate and puts a 30 percent withholding tax on payments from the U.S. to Canada. Here’s what you need to know to stay compliant.

U.S. rental property expense payment reporting

Effective for payments made after December 31, 2010, people receiving rental income and paying a service provider $600 or more in the course of earning that income now have to provide a 1099 -MISC Form to the IRS and to the service provider. The type of payments include those for repairs, maintenance, accounting fees, legal fees and property management fees.

Forms must be filed by February 28 for payments made in the previous calendar year; the first reporting will be February 28, 2012 for payments made in 2011. You will need the service provider’s name, address and US Taxpayer Identification Number (TIN). If the service provider does not provide a TIN, a withholding tax is required.

You should get all TINs in 2010 as you need them before making any payments to determine if withholding tax is required. Withholding taxes must be remitted to the IRS in the month following payment.

Payments made to Canadians (i.e. Canadian accountant) do not have to be reported if the Canadian service provider completes a W-8BEN Form to verify exemption from withholding. Failure to file the annual forms or to withhold tax on payments where required will result in penalties.

The legislation provides for an exemption for properties with only a small amount of rental income. However, to date, the IRS has not issued guidance as to the level of income that will be exempt.

Payments from the U.S.

Effective for payments after December 31, 2012, payments from the U.S. to a Canadian company, partnership or individual will be subject to a 30 percent withholding tax unless the Canadian obtains a waiver of withholding. The Canadian is also required to obtain a TIN and must submit to closer scrutiny by the IRS.

The new legislation is complex and the rules will continue to evolve over the next two years. Canadians with business or investment activity in the U.S. should seek professional advice to ensure that their U.S. activities are in compliance with current U.S. tax law and to prepare for the new reporting requirements. 

About Doug Rosser:

Doug Rosser, CA is an International Tax Specialist with Meyers Norris Penny LLP in Kelowna. Doug has more than 30 years of experience helping individuals and companies ensure they are compliant with international tax regulations. To contact Doug, please call 250-763-8919 or [email protected]

About MNP:

MNP is one of the largest chartered accountancy and business advisory firms in Canada, providing client-focused accounting, taxation and business advice. MNP has proudly served mid-market public and private companies for more than 60 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help clients succeed. For more information, visit http://www.mnp.ca/