Owning foreign property can be an exciting and lucrative venture, but it also comes with unique challenges and obligations—especially for Canadian individuals and corporations. Whether you’re purchasing property for personal use or as an investment, it’s essential to understand the various tax and reporting requirements that come with foreign property ownership.
Determine the purpose and use of the property
The first step in purchasing foreign property is to determine its intended use. Are you buying it for personal and family use, or is it an investment property intended to generate rental income?
Personal use property
If the property is for personal use, the reporting requirements are relatively straightforward. Typically, there are no immediate reporting requirements in Canada or the foreign country if the property is solely for personal use. However, if you sell the property in the future, you may need to report any 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 extensive reporting requirements to consider. You must report your rental income and expenses both in Canada and the country where the property is located.
Reporting requirements in the foreign country
As a Canadian owning foreign investment property, you are required to report the gross income earned from the property and any expenses incurred to the tax authorities in the country where the property is situated. This typically involves filing an annual tax return and paying any taxes due on the net rental income; however, always check the foreign reporting requirements or contact your advisor to ensure compliance.
Reporting requirements in Canada
Canada requires you to report your worldwide income, which includes any rental income from foreign properties. If the country where the property is located has a tax treaty with Canada, such as the United States, 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 United States, you can claim a foreign tax credit for the $3,000 paid. This means you would only owe $2,000 in Canadian taxes on the same income.
Note: Foreign exchange should always be factored in when calculating foreign tax credits, so ensure you take the exchange rate into consideration when running these numbers.
Filing Form T1135
If you own foreign property that is not personal use property or real estate used in an active business, and the cost of your foreign property exceeds $100,000 CAD, you must file Form T1135—the Foreign Income Verification Statement—with your annual Canadian tax return. This form provides the CRA with information about your foreign property holdings. While it doesn’t generate any tax liability, failing to file it on time can result in significant penalties—up to $2,500 per form.
Key considerations and best practices
Maintain proper documentation
Keeping detailed records of all income, expenses, and taxes paid in both countries is crucial. This documentation will support your tax filings and help avoid any issues during audits.
Understand 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 prevent double taxation.
Consult with professionals
Given the complexity of foreign property ownership, it’s wise to consult with tax and legal professionals who specialize in international real estate transactions. They can provide tailored advice and ensure compliance with all reporting requirements.
Purchasing and owning foreign property can be a rewarding experience, but it requires careful planning and adherence to tax laws in both Canada and the foreign country. By understanding the purpose 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 purchasing or owning foreign property or if you need assistance with your tax obligations, contact your advisor. They’re here to help you make informed decisions and ensure compliance with all relevant regulations.
Article written by: Sean Stapleton, CPA, CA