Real estate abroad

[kosta]

What if a newcomer has a real estate in his country of origin? Should it be declared at landing? Will I have to pay taxes from this property once I become a Canadian resident? My guess it that if I don't declare it, I would need to pay taxes on case I sell it and get the money to Canada. But if I declare it as a property I had before landing, will I be able to send it in, say, 10 years, and pay no tax from this amount?

 

[Jonboy]

You don't need to declare anything at landing.

If this is personal use property (e.g. a holiday home) you will only need to declare it if you sell it after you become tax resident in Canada. If you make a profit between the day you became tax resident and the day you sell it then you must declare this on your tax return. 50% of the profit is taxable. However, if you make a loss you cannot claim a deduction so you do not declare this.

If it is an investment property i.e. you earn rental income you must declare the rental income from the day you become tax resident. Also, if your total foreign assets have a "cost" (value on the day you became resident) of more than $100,000 you also have to complete a form T1135 and submit this to the Canada Revenue Agency. Note that you do not have to file this form for the year you become tax resident, but you must for every subsequent year. There is a fine of up to $2,500 a year for failing to file this form.

As with personal use property, if you sell it you calculate a capital gain based on its value on the day you became tax resident in Canada. Unlike personal use property you can also claim a loss if you suffered one. Unfortunately, a capital loss can only be offset against other capital gains, but if you can't use it in one year you can carry it forward to other years.

(Note that I have assumed you will remain in Canada permanently. If you cease to be tax resident in the future you may also have to declare foreign property on your final tax return.)

 

[toby]

You don't need to declare anything at landing.

If this is personal use property (e.g. a holiday home) you will only need to declare it if you sell it after you become tax resident in Canada. If you make a profit between the day you became tax resident and the day you sell it then you must declare this on your tax return. 50% of the profit is taxable. However, if you make a loss you cannot claim a deduction so you do not declare this.


You do get taxed on the net gains if you a re a full-time taxpayer, as Jonboy says, but not if you are not a full-time taxpayer. That is, if you spend less than 183 days in Canada, do not have access to a residence in Canada all year, and do not have dependants or spouse living in Canada, then you are taxable on in-Canada income, and foreign income gained while you happen to be in Canada.. If this is your situation, and if you sell the foreign property while you are outside Canada, it is not taxable in your Canadian tax return.


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[kosta]

Thank you both for the informaiton. However, one issue is still not clear:

Personal property, price is lower than $100K. As far as I understood, making profit between the day of lending and the day of selling the property means that the market price has increased. Which is quite possible, but it can also go down. How shall I justify that there has been no significant difference in market price during this period? Should I have it assessed before lending and than, if I sell it with the price higher than that, I would need to pay the tax? I mean how are they (and actually me too) know whether there was a profit or not?

 

[Jonboy]

The onus is on you to provide the necessary documentation.

a) Ideally you will get an independent professional appraisal shortly before you move to Canada. Although this does cost you money you have the peace of mind of knowing this cannot be challenged.

b) Next best would be a suggested selling price by a realtor or estate agent. I am not sure where you are at the moment but in the UK, where I am originally from, estate agents will estimate a selling price and put this in writing. They will often do this for free if they think they might get some work from it!

c) Another option is to look up some listings of other nearby properties that are for sale. Compare them to yours and make adjustments because of the property features. Maybe yours is worth 10% less than another for sale because it has only two bedrooms and not three. And so on.

Most likely the CRA will accept whatever you put on your tax return. There is still a presumption of honesty. However, if they do decide to take a further look at your return you need to able to support the amounts you have declared.

 

[Jonboy]

You do get taxed on the net gains if you a re a full-time taxpayer, as Jonboy says, but not if you are not a full-time taxpayer. That is, if you spend less than 183 days in Canada, do not have access to a residence in Canada all year, and do not have dependants or spouse living in Canada, then you are taxable on in-Canada income, and foreign income gained while you happen to be in Canada.. If this is your situation, and if you sell the foreign property while you are outside Canada, it is not taxable in your Canadian tax return.

I don't understand what you mean by a part-time tax payer. A person can only be a tax resident (deemed or factual) or a tax non-resident (again, either deemed or factual). A tax resident is liable to Canadian income tax on their world wide income and a tax non-resident on their Canadian sourced income.

The only circumstance I can envisage where you could be taxable on your world-wide income for part of a year is in the year you become tax resident in Canada, or the year you cease to be a tax resident.

 

[toby]

I don't understand what you mean by a part-time tax payer. A person can only be a tax resident (deemed or factual) or a tax non-resident (again, either deemed or factual). A tax resident is liable to Canadian income tax on their world wide income and a tax non-resident on their Canadian sourced income.

The only circumstance I can envisage where you could be taxable on your world-wide income for part of a year is in the year you become tax resident in Canada, or the year you cease to be a tax resident.

This issue is complex, and was debated extensively in this and another forum – within the past year. You could search for the summary by looking for posts by “toby” I believe. Here is a very brief summary.

If the PR resides in Canada full time, he/she pays tax on worldwide income (Canada income and foreign income).

If the PR resides outside Canada for part of the year, but is a full-time resident for tax purposes, then he/she is taxed on worldwide income.

He/she is a full-time resident for tax purposes if he/she (1) spends 183+ days in Canada, or (2) has a full-time residence available in Canada, or (3) has a spouse and/or dependants in Canada. These are the main criteria.

However, a person may be a resident for Immigration purposes by spending an average of 146+ days in Canada, but NOT a full-time taxpayer in CRA’s eyes if he/she does not meet one of the three criteria in the above paragraph. In this case, the person is taxable on Canadian income received throughout the year, but is taxable only on that foreign income that is received while he/she is in Canada.

So, for example, someone who is a PR, but lives in a foreign country 200 days a year, and in Canada 165 days a year, could arrange his or her financial affairs to sell a major property while outside Canada, and the capital gains would not be taxable in the Canadian tax return.

 

[Jonboy]

This issue is complex, and was debated extensively in this and another forum – within the past year. You could search for the summary by looking for posts by “toby” I believe. Here is a very brief summary.

I did search through some of your previous posts but I am still not convinced by your conclusions.

If the PR resides in Canada full time, he/she pays tax on worldwide income (Canada income and foreign income).

Agreed.

If the PR resides outside Canada for part of the year, but is a full-time resident for tax purposes, then he/she is taxed on worldwide income.

Agreed.

He/she is a full-time resident for tax purposes if he/she (1) spends 183+ days in Canada, or (2) has a full-time residence available in Canada, or (3) has a spouse and/or dependants in Canada. These are the main criteria.

In case (2) or (3) the person is almost certainly a factual tax resident. In case (1) the person will be a deemed resident if they are not a factual resident - you cannot be both at the same time.

However, a person may be a resident for Immigration purposes by spending an average of 146+ days in Canada, but NOT a full-time taxpayer in CRA's eyes if he/she does not meet one of the three criteria in the above paragraph.

While this is technically correct I find it difficult to image the circumstances where it could happen in practice. Maybe where the PR is married to a Canadian citizen, was tax resident but has now gone non-resident? I am not disputing that it is possible.

In this case, the person is taxable on Canadian income received throughout the year, but is taxable only on that foreign income that is received while he/she is in Canada.

However, I do disagree with this. Everyone, resident or not, is taxable on Canadian source income unless the income is subject to the provisions of a tax treaty. Only a tax resident is taxed on non-Canadian income. In the situation you give - that a person in resident for immigration purposes, but non-resident for tax purposes, their foreign income would not be taxable in Canada regardless of whether or not they were in Canada at the time it was received.

The only exception I can think of is in the year a person became tax resident in Canada, or ceased to be tax resident in Canada. However, this does not seem to be the scenario you are outlining.

So, for example, someone who is a PR, but lives in a foreign country 200 days a year, and in Canada 165 days a year, could arrange his or her financial affairs to sell a major property while outside Canada, and the capital gains would not be taxable in the Canadian tax return.

Living outside Canada for 200 days in a year does not automatically make someone a non resident for tax purposes. But, assuming that they have severed residential ties to the country sufficient to achieve non tax resident status, it would not matter when they sold the property - they are non resident so foreign income is not taxable in Canada.

 

[toby]

Look at ITT 221 R3, in particular clause 20 on sojourning in Canada. It’s thrust is to deem a person who does not have sufficient ties to Canada, but who spends more than 183 days in Canada, a taxpayer, hence taxable on worldwide income received throughout the entire year.

Sojourners
¶ 20. An individual who has not established sufficient
residential ties with Canada to be considered factually
resident in Canada, but who sojourns (that is, is temporarily
present) in Canada for a total of 183 days or more in any
calendar year, is deemed to be resident in Canada for the
entire year, under paragraph 250(1)(a) of the Act.

But conversely, if that person spends less than the 183 days, and lacks the other major ties to Canada, it follows that he/she is NOT taxable on worldwide income throughout the entire year.

The purpose of the next paragraph is to catch him/her if she falls under para 250 of the Income Tax Act. Paragraph 250 deals with people who work for a Canadian company or Canadian government abroad, or are members of the armed forces. But if the person is not caught by para 250, and (again) has insufficient ties to Canada, this clause 20 (again) allows for them to be in Canada and yet not be taxable on foreign incoe while outside Canada.

Note the wording: “In particular, whereas an individual who is resident in Canada for part of a year is only taxed on his or her worldwide income for that part of the year ….”(my italics)

Clearly (to me at any rate) that person is taxed on foreign income only while he/she is in Canada, and it follows that he/she is not taxed on foreign income while outside Canada.

The remainder if that paragraph is included here so you can come to your own conclusion about its relevance (or irrelevance) to someone who is not caught by para 250.

“… in accordance with the rules under section 114 of the Act, the individual who is deemed to be resident in Canada pursuant to paragraph 250(1)(a) of the Act is liable for tax on his or her worldwide income throughout the year.”

 

[toby]

Jonboy:

I looked for the summary of this issue, which I wrote many months ago, perhaps as long ago as Jan 2010? Did you happen to see it? And if so could you guide me to it; for some reason I did not save it.

 

[Jonboy]

Look at ITT 221 R3, in particular clause 20 on sojourning in Canada. It's thrust is to deem a person who does not have sufficient ties to Canada, but who spends more than 183 days in Canada, a taxpayer, hence taxable on worldwide income received throughout the entire year.

Sojourners
¶ 20. An individual who has not established sufficient
residential ties with Canada to be considered factually
resident in Canada, but who sojourns (that is, is temporarily
present) in Canada for a total of 183 days or more in any
calendar year, is deemed to be resident in Canada for the
entire year, under paragraph 250(1)(a) of the Act.

But conversely, if that person spends less than the 183 days, and lacks the other major ties to Canada, it follows that he/she is NOT taxable on worldwide income throughout the entire year.

The purpose of the next paragraph is to catch him/her if she falls under para 250 of the Income Tax Act. Paragraph 250 deals with people who work for a Canadian company or Canadian government abroad, or are members of the armed forces. But if the person is not caught by para 250, and (again) has insufficient ties to Canada, this clause 20 (again) allows for them to be in Canada and yet not be taxable on foreign incoe while outside Canada.

I have no issues with any of the above.

Note the wording: “In particular, whereas an individual who is resident in Canada for part of a year is only taxed on his or her worldwide income for that part of the year ....”(my italics)

Clearly (to me at any rate) that person is taxed on foreign income only while he/she is in Canada, and it follows that he/she is not taxed on foreign income while outside Canada.

To make sense of this you have to read tax-resident whenever the CRA writes resident. It is saying that someone who is tax resident in Canada for part of the year (essentially an immigrant or emigrant) is only taxed on their world-wide income for the part of the year they are tax-resident in Canada.

The situation you described was a person who is non-resident for tax purposes, but who stays in Canada for 150 days a year to maintain their PR status. Assuming this person passes the tests for non-residency for tax purposes, staying in Canada for 150 days will not make them tax-resident. Therefore they remain non-resident for tax purposes and are not taxable on their non-Canadian income, whether or not they were in Canada when it was received..

 

[toby]

Interesting, Jonboy. Your thinking seems to be changing on this topic (not a bad thing; a good thing). I mention this only to make sure I am not misinterpreting your position. The benefit here is for us both (and the few patient members still reading this post) to come to a better understanding of the tax-reduction opportunities available to us.

At first you seemed to be questioning the “fact” that a non-resident (for tax purposes), but a resident (for immigration purposes), could escape tax on foreign income while outside Canada. You asked how a person could be a resident of Canada and yet not a taxpayer on worldwide income. You thought this might be possible only in the first year of immigrating to Canada.

Have I understood you correctly to this point?

Now you are embracing the possibility that a perpetual part-time resident (hence never a taxpayer in CRA’s eyes) could escape tax on foreign income -- not only while outside Canada as I have been stating, but while inside Canada too. I’d love to believe you, but I am cautious where CRA is concerned. Canada may be a democracry, but CRA is fast becoming something else.

Let’s look again at CRA’s words, and please forgive the pedantic tone here, but deciphering CRA’s intent can be difficult and tedious, and extreme care with each word is warranted.

In ITT 221, CRA says: “In particular, whereas an individual who is resident in Canada for part of a year is only taxed on his or her worldwide income for that part of the year….”

This text seems to say that even if the resident (143+ days = immigration resident) is not deemed to be a resident (for tax purposes), that individual is still taxed on foreign income while in Canada; the big concession is that he/she is not taxed on foreign income while outside Canada.

If you can refute my conclusion, I’ll owe you a few beers. Please do!!

 

[Jonboy]

Interesting, Jonboy. Your thinking seems to be changing on this topic (not a bad thing; a good thing). I mention this only to make sure I am not misinterpreting your position. The benefit here is for us both (and the few patient members still reading this post) to come to a better understanding of the tax-reduction opportunities available to us.

At first you seemed to be questioning the “fact” that a non-resident (for tax purposes), but a resident (for immigration purposes), could escape tax on foreign income while outside Canada. You asked how a person could be a resident of Canada and yet not a taxpayer on worldwide income. You thought this might be possible only in the first year of immigrating to Canada.

Have I understood you correctly to this point?

No. A non-resident for tax purposes is never taxed on foreign income. If what I wrote suggested anything else it is just me not expressing myself clearly.

Now you are embracing the possibility that a perpetual part-time resident (hence never a taxpayer in CRA's eyes) could escape tax on foreign income -- not only while outside Canada as I have been stating, but while inside Canada too.

There is no concept of a part-time resident in the Income Tax Act. (There is in the Excise Tax Act but not the ITA). For tax purposes you are either resident or not.

I'd love to believe you, but I am cautious where CRA is concerned. Canada may be a democracry, but CRA is fast becoming something else.

I think your caution is well merited but at the end of the day the CRA are required to administer the ITA.

Let's look again at CRA's words, and please forgive the pedantic tone here, but deciphering CRA's intent can be difficult and tedious, and extreme care with each word is warranted.

No worries. Pedantry is necessary.

In ITT 221, CRA says: “In particular, whereas an individual who is resident in Canada for part of a year is only taxed on his or her worldwide income for that part of the year....”

This text seems to say that even if the resident (143+ days = immigration resident) is not deemed to be a resident (for tax purposes), that individual is still taxed on foreign income while in Canada; the big concession is that he/she is not taxed on foreign income while outside Canada.

If you can refute my conclusion, I'll owe you a few beers. Please do!!

As I said in an earlier post, when the ITA refers to a resident it means a tax-resident. The CRA follow the same convention in their interpretation bulletins. That sentence should be read as “In particular, whereas an individual who is tax-resident in Canada for part of a year is only taxed on his or her worldwide income for that part of the year....”

The situation you describe is someone who is not a resident for tax purposes at any time during the year, therefore this does not apply.

 

[Jonboy]

(and the few patient members still reading this post)

I am sure thousands have bookmarked the page!

If you can refute my conclusion, I'll owe you a few beers. Please do!!

I'm always up for a beer!

I wish I could point you to a part of the legislation that confirms what am arguing, but I can't. The ITA says who should pay tax, and how much, but it is silent on who doesn't.

This is from the CRA website: http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html

Your tax obligations

As a non-resident of Canada, you pay tax on income you receive from sources in Canada. The type of tax you pay and the requirement to file an income tax return depend on the type of income you receive.

 

[toby]

So much depends on the interpretation of "resident" that more research is needed. Nothing worse than not mentioning foreign income in a tax return, getting audited, and then trying to explain to CRA that you did not mention it based on the "conclusion" that when ITT 221 says "resident", it really means "taxpayer". I'd want a stronger basis than that.

The Tax Act is not much help, since it doesn't define "resident". But it does refer to a recent immigrant as a"resident" when it is not clear that the immigrant is (yet) a taxpayer. So, some uncertainty -- enough rope for a vindictive auditor to hang me or you. Better to be thorough at this stage. I don't share your confidence in the fair mindedness of CRA; I've witnessed some horror stories.

I'm going to ask an accountant, and am sending you the proposed text beforehand for approval.