This article, written by Sean Stapleton, CPA at DMCL, is taken from the Quarterly Overview of Canadian News, a newsletter published by Canadian member firms of Moore North America.
L’article s’inscrit dans notre mission, soit devenir le partenaire par excellence de votre réussite en vous tenant informé de l’actualité. Owning property abroad can be an exciting and lucrative venture, but it also brings unique challenges and obligations, particularly for Canadian individuals and businesses.
Whether you’re buying property for personal use or as an investment, it’s essential to understand the various tax and reporting requirements associated with owning real estate abroad.
Determine the intended use of the property
The first step in buying a property abroad is to determine its purpose.
Are you buying it for personal, family use, or is it an investment intended to generate rental income?
Property for personal use
If the property is for personal use, the declaration requirements are relatively straightforward.
As a general rule, there is no immediate reporting obligation in Canada or the foreign country if the property is for personal use only.
However, if you sell the property in the future, you may have to declare the capital gains or losses on your Canadian tax return.
Investment property
If you’re buying the property as an investment to generate rental income, there are more reporting requirements to consider.
You must declare your expenses and rental income not only in Canada, but also in the country where the property is located.
Reporting requirements in the foreign country
As a Canadian owning a property abroad, you must declare the gross income generated by the property and the expenses incurred to the tax authorities in the country where the property is located.
This usually involves filing an annual tax return and paying taxes due on net rental income; however, it’s always best to check local reporting requirements or consult your advisor to ensure compliance.
Canadian tax reporting requirements
Canada requires you to declare your worldwide income, including rental income from foreign properties.
If the country where the property is located has a tax treaty with Canada, such as the U.S., you can avoid double taxation by claiming a foreign tax credit on your Canadian tax return.
For example, if you owe $5,000 in taxes on your net rental income in Canada, but have already paid $3,000 in taxes in the U.S., you can claim a $3,000 foreign tax credit.
This means you’ll owe only $2,000 in Canadian taxes on the same income.
Note: The exchange rate must always be taken into account when calculating foreign tax credits, so be sure to consider the exchange rate when making these calculations.
Form T1135 declaration: specified foreign property
If you own foreign property that is not personal-use property or real estate used in an active business, and its cost exceeds $100,000 CAD, you must submit Form T1135, Foreign Income Verification Statement, with your annual Canadian income tax return.
This form provides the CRA with information on your foreign assets.
Although it does not generate tax liability, failure to file on time can result in significant penalties, up to $2,500 per form.
Key points to consider and best practices
Keep detailed records
Keeping detailed records of all income, expenses and taxes paid in both countries is crucial.
This documentation will support your tax returns and help avoid any problems during an audit.
Find out about tax treaties
Familiarize yourself with the tax treaty between Canada and the country where your property is located.
These treaties can provide tax relief and avoid double taxation.
Consult the professionals
Given the complexity of owning real estate abroad, it’s a good idea to consult tax and legal professionals who specialize in international real estate transactions.
They can provide personalized advice and ensure compliance with all reporting requirements.
Buying and owning property abroad can be a rewarding experience, but it requires careful planning and compliance with tax laws in both Canada and the foreign country.
By understanding the use of your property, maintaining proper documentation and seeking professional advice, you can navigate the complexities of foreign property ownership with confidence.
If you have any questions about buying or owning property abroad, or need help with your tax obligations, contact your advisor.
He or she is there to help you make informed decisions and ensure compliance with all relevant regulations.
