CRA on the Hunt for Details of Tax Delinquent US Property Owners
By Monica Martinez, CPA, CA, CPA (Illinois)
The Canada Revenue Agency (CRA) is stepping up its efforts to identify Canadian residents who may have undeclared income from real estate property owned in the United States, or who have failed to disclose their US property on CRA’s Form T1135.
To help track down potentially tax-delinquent US property owners, the CRA is seeking a third party supplier to examine all publicly available real estate ownership data, where a Canadian is listed as a party to the purchase, sale, or transfer of the property. Data on property transactions is being sought for all years dating back to 2014, but also going forward on a monthly basis. The company selected to provide this information to the CRA is expected to examine mortgage transactions, property taxes, real property records, and deeds.
The CRA is focused on finding Canadian residents who have unreported rental income from their US property, as well as those who have sold their US property for a profit without declaring the capital gains realized on the sale. Canadian residents who own a US property that is solely for personal use are not subject to potential CRA interest, unless they have made an inappropriate claim for the principal residence exemption on this property.
Since Canadian residents are taxed on their worldwide income, they need to report all their US rental income on their Canadian tax return, even if they pay taxes on this income in the US. The CRA allows them to claim a foreign tax credit for the US taxes paid, so that this income is not subject to double taxation.
Likewise, capital gains on the sale of a property must also be declared even if capital gains tax is paid in the US. However, Canadians who bought property when the Canadian and US dollars were at par will experience a large foreign exchange gain if selling now when the Canadian dollar has dropped in value. The gain that comes about solely through the change in exchange rate will not be taxed in the US, but will be subject to capital gains tax in Canada.
Unreported Foreign Property:
The data collected will also be compared to information provided to CRA in property owners’ T1135 tax reporting. CRA requires Canadian residents to file Form T1135 every year to report their foreign property if the total cost exceeds $100,000. For purposes of this form, foreign property does not include personal use property, such as a Florida condo used only as a vacation home and never rented out. However, a US rental or commercial property must be reported on this form. Failure to file Form T1135 with the CRA or not filing it accurately can result in some hefty fines – $25 a day, up to a maximum of $2,500 a year plus interest.
Finally, Canadian residents who sell a principal residence located in the US must also declare the sale on their Canadian tax return, even if they apply the principal residence exemption. Failure to do so after 2016 can result in significant penalties.
If you are behind on your T1135 reporting or have any undeclared income from property in the US, it will be beneficial to get ahead of a potential CRA audit now to avoid re-assessment of your tax filings and additional penalties and interest.
Monica Martinez is GGFL’s Principal, U.S. and Cross-Border Tax & Advisory Services. She can be reached at 613-694-4430 or at firstname.lastname@example.org.