Miniature House on A Financial Graph

If you have clients who own U.S. real estate — whether for personal use or for investment purposes — now may be a good time to remind them of their Canadian tax-filing obligations, lest they get caught by the Canada Revenue Agency under a new investigatory program.

The CRA posted a request for information (RFI) in June for a provider of U.S. real property data. Specifically, the RFI was looking for data “where a Canadian resident is the owner or party to the purchase, sale, or transfer.” The data was required in bulk form, the document said, “in order to identify current and historical records, mortgage transactions, property taxes, real property records, and deeds.”

The RFI went on to say the requested information “will enhance the CRA’s ability to administer tax programs, to enforce the various Tax Acts in order to protect Canada’s revenue base, and to support the CRA’s business and research processes.” The CRA would be reviewing six years of U.S. real estate transactions in order to find any tax non-compliance by Canadian taxpayers, it said.

Let’s review a few areas that may be on the CRA’s radar, should the agency be successful in obtaining bulk U.S. property records.

Unreported foreign property

Clients who own foreign property with a cost of more than $100,000 at any point in the year must file CRA Form T1135. While foreign property for this purpose doesn’t include personal-use property — meaning clients don’t have to report their Florida condo if it’s solely used as a vacation home and isn’t rented out — clients who own foreign commercial property or rental property must report the details of that property on the form.

Failure to file the T1135 can result in harsh penalties from the CRA, even when all the income from the foreign property has been reported. The penalty is $25 for each day the form is late, up to a maximum of $2,500 per tax year, plus non-deductible arrears interest.

Unreported U.S. rental income

Clients who rent out their foreign real estate are obligated to report, and pay tax on, their foreign rental income. Generally speaking, a foreign tax credit is available to ensure that such rental income, which may also be taxable in the other jurisdiction, is not taxed twice.

Unreported U.S. real estate sales

The CRA will likely be looking into sales of U.S. residential properties owned by Canadian taxpayers to ensure any capital gain is reported on the Canadian return. Again, while a foreign tax credit is generally available for any U.S. capital gains tax paid, foreign exchange movements in recent years may mean some extra Canadian tax.

Also, while a client who claims the principal residence exemption on the sale of their U.S. vacation home won’t pay tax in Canada on that sale, they generally won’t be able to claim a foreign tax credit on their Canadian return in respect of any U.S. tax paid.

For example, if your client bought their Florida condo for US$100,000 in 2012 when the U.S. dollar was at par with the Canadian dollar, but they sold it in 2019 for the same amount when the foreign exchange rate was 1.33, they could have no gain for U.S. tax purposes but a $33,000 gain to report in Canada, with no offsetting foreign tax credit.