Tax Implications of Owning Foreign Property as a Canadian Resident

February 28, 2025
Tax Implications of Owning Foreign Property as a Canadian Resident

Introduction

Many Canadians invest in foreign real estate for vacation homes, rental properties, or investment purposes. However, owning property outside Canada comes with specific tax obligations. The Canada Revenue Agency (CRA) requires Canadian residents to report foreign property holdings, rental income, and potential capital gains when selling the property. Failing to comply with these tax rules can result in significant penalties.

This guide explains the tax implications of owning foreign property as a Canadian resident, including reporting requirements, tax treatment of rental income, and capital gains tax when selling a foreign property.

 

Do You Need to Report Foreign Property to the CRA?

Yes, Canadian residents who own foreign property valued at more than $100,000 CAD must report it to the CRA using Form T1135 - Foreign Income Verification Statement.

 

Who Needs to File Form T1135?

  • Canadian individuals, corporations, trusts, and partnerships that own foreign property exceeding $100,000 CAD in total at any time during the tax year.
  • The $100,000 threshold applies to cost rather than the market value of the property.

Types of Foreign Property That Must Be Reported

  • Foreign rental properties
  • Vacation homes (if rented out)
  • Foreign bank accounts and investments
  • Shares in foreign companies

Exemptions from Reporting on T1135

  • Personal-use property (e.g., a vacation home that is not rented out) does not need to be reported on T1135.
  • If the total cost of all foreign properties is below $100,000 CAD, no reporting is required.

Penalties for Non-Compliance:
Failing to file Form T1135 on time can result in a penalty of $25 per day, up to $2,500 per year. If the CRA determines the failure was intentional, additional penalties may apply.

 

Tax Treatment of Rental Income from Foreign Property

If you rent out your foreign property, you must report the rental income on your Canadian tax return. The CRA taxes worldwide income, including rental income from foreign real estate

How to Report Foreign Rental Income in Canada

  • Declare the income in Canadian dollars on your tax return. Use the Bank of Canada exchange rate for conversion.
  • Report the income on Form T776 - Statement of Real Estate Rentals and include it in your personal tax return (T1).
  • Deduct eligible expenses related to the rental property, such as:
    • Mortgage interest (but not principal payments)
    • Property taxes
    • Repairs and maintenance
    • Utilities (if paid by the owner)
    • Insurance
    • Property management fees

Foreign Tax Credits to Avoid Double Taxation

If you pay taxes on rental income in the foreign country, you may be able to claim a foreign tax credit in Canada using Form T2209 - Federal Foreign Tax Credits.

  • This credit reduces your Canadian tax liability for taxes already paid abroad.
  • The credit cannot exceed the Canadian tax owed on the foreign rental income.

 

Capital Gains Tax When Selling Foreign Property

If you sell a foreign property for a profit, you must report the capital gain to the CRA and pay capital gains tax in Canada.

How to Calculate Capital Gains on Foreign Property

Capital Gain = Selling Price - (Purchase Price + Selling Costs + Capital Improvements)

  • 50% of the capital gain is taxable in Canada.
  • The CRA uses the exchange rate on the purchase and sale dates to calculate gains in Canadian dollars.
  •  

Can You Offset Foreign Capital Gains Tax?

If the foreign country taxes your capital gain, you may be able to claim a foreign tax credit to reduce your Canadian tax bill. However, not all taxes paid abroad are eligible for full credit in Canada.

 

Foreign Inheritance and Gifted Property

If you inherit foreign property, there is no immediate tax in Canada. However, when you sell the inherited property, you will be taxed on the capital gain based on the fair market value at the time of inheritance.

If you gift foreign property to a family member, the CRA treats it as a sale at fair market value, triggering capital gains tax.

 

Estate Tax Considerations in the U.S.

If you own U.S. real estate, you may be subject to U.S. estate tax upon your death.

  • The U.S. estate tax applies to Canadians who own U.S. property valued above $60,000 USD.
  • Canada and the U.S. have an estate tax treaty, which may provide tax relief for Canadians.

Proper estate planning can help minimize U.S. estate tax exposure.

 

How to Minimize Taxes on Foreign Property

  • Keep detailed records of purchase price, rental income, expenses, and capital improvements.
  • Claim foreign tax credits to offset Canadian taxes on foreign rental income and capital gains.
  • Use tax treaty provisions to avoid double taxation.
  • Consider ownership structure (holding a property in a corporation or trust may provide tax advantages).

 

Conclusion

Owning foreign property as a Canadian resident comes with specific tax obligations, including reporting requirements, rental income taxation, and capital gains considerations. Understanding these rules ensures compliance with CRA regulations while optimizing your tax position.

Tax Partners can assist you in navigating foreign property tax rules, maximizing deductions, and ensuring full compliance with Canadian tax laws.

 

This article is written for educational purposes.

 

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

 

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.

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