Tax Brief: Canadian Taxpayers with Real Estate Property in the USA

Towards the end of June 2020, the Canada Revenue Agency (“CRA”) issued a tender notice in order to eventually enable them with the capability to monitor and enforce the tax-compliance of Canadian taxpayers with real estate property in the United States of America (“USA”). This is not a complete surprise, as due to the complexity of international tax-reporting, and the increasing number of individual Canadian taxpayers entering into cross-border real estate transactions, the CRA has been seen a growing trend in non-compliance with the Tax Acts.

This tender notice is a wake-up call for Canadian crossborder real-estate investors in the USA. The CRA will be looking at various data sets in order to help them determine which taxpayers to audit. Canadian taxpayers who get reassessed could face significant tax penalties and late-interest payments, in addition to potential professional and legal fees. Taxpayers who have not declared any related income from these properties, in an effort of tax-avoidance, may also be subject to potential tax fraud and/or evasion penalties.

When it comes to investments in USA real estate, the Canadian taxpayer investor should protect themselves in the following major areas:

  1. Appropriate reporting of foreign property: Canadians with foreign property (other than personal-use property) valued at over $100,000, are required to file a T1135 annually. For certain other Canadian investor taxpayers, a T1134 form must be filed in relation to foreign property owned, if the corporation owning the real estate is deemed a controlled foreign affiliate. Even if no personal tax return is required to be filed, failure to file the T1134 and/or T1135 could result in thousands in dollars of late/non-filing penalties.

  2. Unreported rental income and capital gains or losses: As the Canadian Tax Act requires Canadians to pay tax on their worldwide income, any income generated via real estate rentals must be reported and declared to the CRA. To avoid double-taxation, depending on the structure of your USA real estate investment, foreign tax credits may be utilized to reduce the tax owed to the CRA, by the amount of tax paid to the IRS.

Canadian real estate investors should be aware that just because they filed/paid taxes to both the IRS and CRA, in relation to their USA real estate investment(s), does not mean they can relax. Due to the differing and complexity of taxation rules between the IRS and CRA, unless the Canadian taxpayer has appropriately filed their taxes in both jurisdictions, they may still find themselves and their tax amounts being audited by the CRA

Canadian taxpayers who become aware of their non-compliance, do have an option to be brought back into compliance via a voluntary disclosure. It is highly advised that you speak to your qualified tax representatives, to ensure you’ve properly filed your taxes in both Canada and the USA.

Questions in how the above matter may relate to you? Reach out to Blumenfeld Woznica & Co to see how this matter may impact your specific accounting and/or tax situation.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as account/tax opinion or advice.

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