I am a Canadian owner of a US rental. Does a 1031 work for me?

The US half works the same way it does for any foreign owner

Nothing in section 1031 asks where the owner lives. The constraint is on the property: section 1031(h) says US and non-US real property are not like-kind, so a Florida rental can become a Texas warehouse or a DST interest but not a condo in Toronto.

For a foreign seller, Reg. section 1.897-6T allows the deferral only when the replacement is a US real property interest that would be taxed on a later sale and the required statement is filed with the US return. The buyer withholds 15% of the price under section 1445 unless a withholding certificate application is in by closing, as explained on FIRPTA withholding in a 1031.

Canada taxes the sale in the year it happens

The CRA's foreign tax credit folio opens with the baseline: "Residents of Canada are generally taxed on their worldwide income." A gain on a US rental is reported on your Canadian return for the year of sale, measured in Canadian dollars.

Canada has its own replacement-property rule in section 44 of the Income Tax Act, but for a voluntary sale it applies only to "former business property," and the definition in section 248(1) of the Income Tax Act states that the term does not include a rental property. So the US exchange has no Canadian twin: the CRA sees a taxable sale.

The foreign tax credit only matches tax paid for the same year, and the exchange breaks that match

Under the US-Canada treaty, Article XIII lets the United States tax gains on real property in the United States, and Article XXIV has Canada credit US tax on gains arising there. The folio adds the condition that matters: foreign tax counts only if it is paid "for the year," meaning the year the foreign country taxes that income.

In an exchange the US taxes nothing in the sale year, so Canada has nothing to credit. When you later sell the replacement, the US taxes the old deferred gain plus any new gain, but Canada already taxed the old gain years ago and your Canadian cost is the full replacement price, so there may be little Canadian tax that year for the US tax to offset.

The CRA describes this exact risk: "Double taxation may occur if Canada and another country levy tax in different tax years with respect to a particular transaction." It notes relief "may be possible in some cases" under paragraph 8 of Article XIII with section 115.1 of the Act. That paragraph is written for corporate organizations and reorganizations, so do not assume it reaches a 1031.

Hypothetical: a $400,000 gain taxed in two different years

A Canadian resident sells a US rental with a $400,000 gain, ignoring currency movements. All figures are hypothetical; run your own numbers with a CPA who files both returns.

• Sell and pay: the US taxes the $400,000 this year, Canada taxes it this year, and the Canadian credit for US tax paid generally leaves you paying roughly the higher of the two countries' tax.
• Exchange: the US defers the $400,000. Canada taxes it now with no US tax to credit, so you pay Canadian tax in full this year.
• Ten years later the replacement sells for a further $200,000 gain. The US taxes $600,000; Canada taxes only the $200,000 measured from its higher cost.
• Canada's credit is limited to its own tax on that year's US-source income, so the US tax on the original $400,000 may go uncredited, and that is the double tax.
• The folio allows carryover only of foreign business-income tax, which a passive rental gain generally is not.

Run both countries' numbers before you list the property

The decision is cross-border, so the steps are too.

• Have one adviser model the sale and the exchange in both countries, year by year, including currency.
• Ask specifically whether any treaty relief applies to your facts before relying on deferral.
• Apply for an ITIN and Form 8288-B early, as set out on the ITIN timing page.
• Keep reporting the property on Form T1135 if its cost exceeds $100,000 and you hold it for profit, as the CRA T1135 questions explain for a rented Florida condominium.
• If you still exchange, the replacement can be direct property or a traditional DST; the withholding issues inside a DST are on foreign investors and DSTs.