This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
On June 25, 2020, the CRA posted a tender notice asking for assistance so that CRA would be able to mine the data of Canadian residents who purchase, sell or transfer U.S. real estate. The goal for CRA is the ability to sort through bulk information including historical records, mortgage transactions, property taxes, real property records and deeds. The CRA wants to “enhance the CRA’s ability to administer tax programs, to enforce the various tax acts in order to protect Canada’s revenue basis, and to support the CRA’s business and research processes.”
This is a significant event that all taxpayers must be aware of. This means that CRA is actively planning to obtain information to determine if Canadian residents have properly recorded the U.S. transactions on their Canadian tax returns.
There are several issues that Canadians should be aware of when they have U.S. or foreign real estate property:
- T1135 – Foreign Reporting;
- Reporting rental income;
- Reporting the sale of the property;
- Voluntary Disclosure
T1135- Foreign Reporting
Where a Canadian owns foreign property costing more than CDN $100,000, a Canadian taxpayer is required to report the foreign property on a form T1135. If the property is completely personal and / or has a cost base of CDN $100,000 or less, then there is no need to report.
If the property should have been reported and it was not, there is a penalty of $25 per day up to a maximum amount of $2,500. This would apply for each year that the property has not been reported on the T1135. There are harsher penalties which could apply, for example, a penalty of 5% of the cost of the foreign property if it has not been reported for 24 months.
Reporting Rental Income
A Canadian resident taxpayer is required to report its world-wide income. This means that any income earned on the rental of a property located outside of Canada needs to be reported in Canada. If there are foreign income taxes payable, then the Canadian taxpayer would get credit for those foreign income taxes. However, the fact that there may be no Canadian taxes because there were foreign taxes paid does not negate the fact that the rental income must be reported along with the foreign tax credit. Generally, there are Canadian taxes over and above foreign income taxes because of Canada’s high tax rates.
For U.S. rental properties, the U.S. tax rules on depreciation and deductible expenses are not the same as the Canadian rules. Therefore, it is possible that there would be no taxable income in the U.S. but that there would be taxable income and taxes in Canada. Again, a taxpayer cannot assume that because there is no income or taxes in the U.S. that there is nothing to report in Canada.
Reporting Sale of U.S. Real Property
In the United States, a taxpayer must report the disposition of U.S. situs property such as U.S. real estate. There are certain exemptions which may reduce the taxes payable in the United States. However, as a Canadian resident, the taxpayer must report this disposition in Canada as well. The U.S. tax rate on capital gains is slightly less than the capital gains tax rate in Canada. Therefore, there likely is additional Canadian tax payable on the disposition of the property. Moreover, there will be instances where there may be little or no gain in the U.S., but because of foreign exchange adjustments, there would be a capital gain in Canada. The capital gain in Canada is based on the foreign exchange rate at the time of the purchase and the foreign exchange rate at the time of the sale. In 2007, the Canada / U.S. foreign exchange rate was par. At present, it is close to 1.40. Therefore, a property that did not go up in value in U.S. dollars would have a 40% capital gain in Canada.
If any of the above situations apply, taxpayers can avail themselves of the voluntary disclosure process if they meet certain conditions. In very general terms, the conditions would be that CRA has not asked about any of the above items and has made no communication as to whether these items have been reported. Once a taxpayer receives any kind of correspondence from CRA, it is very difficult to get into the voluntary disclosure program. The benefit of the voluntary disclosure program is that no penalties would be assessed. If there are taxes owing, there would still be the taxes owing and interest. For the foreign reporting, especially, the voluntary disclosure program ensures that there is no tax cost to filing the unreported T1135 forms for the prior years.
Your DMCL advisor would be happy to discuss these options and prepare the necessary filings and possible voluntary disclosure.
Contributed by Howard Wasserman, CPA, CA, CFP, TEP, from Segal LLP. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.