We have a property that we rent out in Canada. Can we report the rental income and expense on Scheudle E of 1040 form in the US?

All US Citizens and residents are required to file a US tax return on their worldwide income. Thus, if you have an investment rental property anywhere, you must report it on your tax return to the IRS http://www.irs.gov

The Canadian CRA http://www.cra-arc.gc.ca/menu-e.html will require you to file a tax return on all "Canadian source" income, and pay the applicable taxes. This would also include your rental property.

On your IRS return, you will be able to claim a tax credit, the Foreign Tax Credit (Form 1116). The credit on your US 1040 return will be the lesser of the US tax or the Canadian tax paid on your rental property income.

If your property has a loss, it would still be reported to both agencies, and would be a loss on your US return.