In June, the Canada Revenue Agency (CRA) announced that they will review six years of US real estate transactions to determine if any Canadian taxpayers missed reporting their ownership of real estate property or real estate transactions. Could this apply to you?
You could be affected if:
- You owned US property and missed reporting ownership over that property on an annual basis
- You rented out your US property and missed reporting the rental income
- You sold US property and did not report the sale of that property properly
If any of these circumstances apply to you, you could be reassessed and face substantial penalty and interest charges as a result of the upcoming tax audit. In more serious instances, there’s also a possibility that you could be prosecuted for tax fraud or tax evasion.
This article will outline some common mistakes that may have taken place and what your next steps should be.
Missed, Incomplete or Late-Filed T1135
A Canadian taxpayer is required to complete a T1135 Foreign Income Verification Statement to disclose their ownership over foreign property if the cost of such property is greater than $100,000 CAD. There is an exception for property that is considered personal use property (exclusively used personally). The penalty for not filing the T1135 or not filing it properly is $25 per day with a minimum penalty of $100 and a maximum penalty of $2,500. If a taxpayer has, with full knowledge, failed to file a T1135, the penalty increases to $500 per month for up to 24 months and if the CRA issues a demand for the return, the penalties become even more severe.
Missed reporting of rental income
A Canadian taxpayer is required to pay Canadian tax on their world-wide income which includes rental income earned from foreign properties. The rental income must be converted into Canadian dollars and reported on the Canadian return. Reasonable expenses incurred to earn the rental income may be deducted and a foreign tax credit may be available for the U.S. tax that was paid.
Missed reporting of sale of property
A Canadian taxpayer must also report the capital gain or loss realized on the sale of their foreign properties on Schedule 3 of their tax return. The cost base of the property must be converted into Canadian dollars at the time of purchase. Any improvements made to the property must be converted into Canadian dollars and support should be kept as proof. The proceeds should be converted into Canadian dollars at the time of the sale. The capital gain therefore can include a foreign exchange gain or loss. A foreign tax credit is available to be claimed for any U.S. tax that is paid. You may also want to review our previous article: Thinking about selling your U.S. Vacation Property? What you should know to learn more about the tax consequences of selling U.S. property.
How do I fix a mistake?
The CRA offers a voluntary disclosure program (VDP) which allows Canadian taxpayers to correct errors and remedy missed filings. You may find it useful to read this article which describes the VDP program in more depth, but briefly the program has two main categories: general and limited. The general category is for submissions where there appears to be no intentional misconduct and provides partial interest relief, removal of any penalties and protection from prosecution. The limited category provides no interest relief, limited penalty relief and protection from prosecution.
Since the CRA has announced its intention to audit U.S. real estate transactions, applicants may only be eligible for the limited relief category. But this category still provides many benefits that should be carefully considered. A timely filed VDP submission could help avoid gross negligence penalties and prosecution for tax fraud or tax evasion. Thus, it is important to carefully consider using this program to help fix any reporting mistakes and to reach out to a tax specialist as soon as possible.
How we can help
In reviewing your financial plan, the tax that you pay throughout your lifetime and on death are factored in. Your IG Consultant can help you understand what the tax consequences are when you purchase, rent out or sell a US property. They can also help you identify these tax consequences on a pro-active basis so that costly mistakes are avoided. If you are concerned that you may be affected by this upcoming CRA audit, reach out to your IG Consultant and your accountant to determine what your next step should be.