Do you know the Canadian capital gains taxes on foreign property? If you don’t know, Many Canadian citizens own investment properties in the United States and in other countries.
Canadian tax law states that Canadian citizens must pay taxes on any investment income they earn anywhere in the world. If you sell a property in another country, you still have to pay capital gains taxes on it, even if the property was in the United States, Mexico, or some far-flung, exotic location halfway around the world.
Here’s what you need to know about capital gains taxes on the sale of foreign properties.
- 1 What is Canadian Capital Gains Taxes on Foreign Property?
- 2 How are Foreign Capital Gains Taxed in Canada?
- 3 How Can You Avoid Capital Gains Taxes on Foreign Property?
- 4 How Do You Report Foreign Capital Gains in Canada?
- 5 What Happens If You Fail to Report Foreign Capital Gains?
- 6 Can a Real Estate Lawyer Help with Foreign Capital Gains Tax Problems?
What is Canadian Capital Gains Taxes on Foreign Property?
The capital gains tax is a tax on the sale of any investment asset whenever you sell that asset for more than you bought it for. Essentially it’s an income tax, and only the tax is on income earned from investments instead of on income earned from wages.
This works the same way regardless of where the property or investment is located. You’re taxed the same on foreign capital gains as you’d be taxed on domestic capital gains.
Of course, the country where the property is located may have its own laws and its own requirements. For example, you usually have to pay something to the American Internal Revenue Service when you sell a property, too. In many cases, the foreign governments will require that taxes to be withheld at the time of sale so that you don’t just take the money and run.
Fortunately, Canada does offer a federal foreign tax credit. If you’ve been charged tax by the country where you sold your investment, then you can file a T2209 to claim a tax credit of up to 15% on the foreign taxes you paid on the sale.
This will be based on the tax treaty between the other country and Canada. If you have not yet invested in property outside of Canada, it is wise to explore the tax treaties between Canada and the nation where you are thinking of making your purchase. Your real estate lawyer can help you determine what the potential tax credit rate might be.
How are Foreign Capital Gains Taxed in Canada?
When you sell your property, you’re going to subtract the adjusted base cost from the sales price.
Let’s say you bought your foreign property for $100,000. You then sell it for $200,000. Between the time you bought it and the time you sold it, you spent $35,000 improving the property. Note that this isn’t the same as maintaining the property. Renovating the kitchen to update it is a capital improvement; repairing a broken cabinet door is not.
Your adjusted base cost is $135,000. That makes your capital gain $65,000. The Canadian government only taxes half of that, or $32,500. That $32,500 becomes part of your income when you report it at the end of the year. That is, if you make $100,000 a year from your job, you’ll report $132,500 in income that year because you also made income through the sale of your investment property.
How Can You Avoid Capital Gains Taxes on Foreign Property?
There is no legal way to avoid capital gains tax on foreign property. You must report the sale, report the sale price, and pay the tax.
There are exemptions to the capital gains taxes, but none of them would apply to any foreign investment property. The general assumption is that if you have the money to buy properties overseas, you probably have the money to meet your tax burden.
Most of our clients find that they are still capable of realizing excellent profits on their investments in spite of the capital gains tax. It’s certainly far cheaper to play by the rules and to pay the taxes correctly than it is to end up in tax litigation or criminal proceedings because you failed to report the taxes appropriately.
How Do You Report Foreign Capital Gains in Canada?
You’ll report them on the same schedules you’d use to report any capital gains using Form T11135, but you’re going to do so after you convert all amounts to Canadian dollars. You’ll do this using the exchange rate on the day you bought or sold the property.
What Happens If You Fail to Report Foreign Capital Gains?
You can face massive penalties. If you fail to file the information knowingly or “under the circumstances amounting to gross negligence,” the penalty is $1,000 per month to a maximum of $24,000. If you fail to file the information for more than 24 months, they impose additional penalties, less any penalties already levied, of either 5% of the cost of the property or 5% of the fair market value of the property.
If you have failed to file in the past through an honest mistake and need help getting penalties removed or rectifying the situation before penalties are applied, you should reach out to a qualified real estate lawyer right away.
Can a Real Estate Lawyer Help with Foreign Capital Gains Tax Problems?
Sometimes disputes arise between the foreign government’s vis a vis tax rates and tax credits. This can lead to disagreements with one tax agency or the other, which your local real estate lawyer can help clear up. We can also help with tax planning, ensuring that you don’t pay a penny more in capital gains taxes than you have to. We hope now you understand Canadian capital gains taxes on foreign property.
Our legal team has decades of real estate experience. Make sure your interests are protected. Our team is well-prepared to offer a great deal of support to serious investors.
Call (780) 488-4152 to set up an appointment today.