Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a taxable capital gain realized on the disposition of real property situated outside Canada by a Canadian resident individual is subject to tax in Canada
Position: Yes
Reasons: A Canadian resident individual is subject to income tax in Canada on his or her worldwide income
2008-029449
XXXXXXXXXX D. Boychuk
(613) 948-5274
November 14, 2008
Dear XXXXXXXXXX :
Re: Real Property Situated Outside Canada
This is in response to your letter of September 18, 2008 in which you inquired about the Canadian tax implications relating to the possible sale or rental of real property (condo apartment) situated outside Canada. As a matter of background, you indicated that you bought the condo in XXXXXXXXXX and that, at the time you immigrated to Canada in XXXXXXXXXX , the condo had a fair market value of approximately $XXXXXXXXXX Cdn. You also stated that the property is for your own use and enjoyment and that it is not currently being used as a rental property.
More specifically, your questions are as follows:
(a) If you sell the condo, do you have to report the gain for Canadian tax purposes?
(b) If you rent the condo, do you have to report the rental income for Canadian tax purposes?
In your letter, you also asked about your foreign property reporting obligations (filing of Form T1135) and what information you would be required to provide to the Canada Revenue Agency (CRA) should you sell the condo.
This Directorate does not provide assurances regarding the tax consequences relating to proposed transactions that involve specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca.
Although we cannot provide you with any assurances regarding the specific tax consequences relating to the transactions described in your letter, we can provide you with the following general comments regarding the tax treatment of a Canadian resident individual who sells or rents real property situated outside Canada. Please note that our comments are premised on the assumption that the property in question does not qualify as the individual's principal residence and that, in the event of a sale, the sale proceeds will be paid in full in the year the property is sold.
(a) Gains from the sale of real property
A Canadian resident individual is subject to tax in Canada on any gains from the sale of real property situated inside or outside Canada. Where the property is capital property to the individual, one-half of the gain (i.e., the taxable capital gain) is included in computing the individual's income.
Where the proceeds from the sale of the property are paid in a foreign currency, those proceeds must be converted to Canadian currency using the relevant exchange rate for the day of the sale. The gain or loss on the property is the amount by which the sale proceeds exceed the cost of the property and any expenses incurred for the purpose of making the sale. In the circumstances described in your letter, the acquisition cost of the property, for Canadian tax purposes, would be its fair market value (in Canadian currency) at the time you became a resident of Canada.
If an individual files a paper return, the individual is not required to submit, with the return, any documents relating to the purchase and sale of the property. However, the individual should retain these documents in the event that we ask to review them. For the purposes of claiming any foreign tax credit (discussed below), the individual would be required to include, with a paper return, a document, such as an official receipt, from the foreign government confirming the payment of the foreign tax. If the individual does not file a paper return (i.e, the individual files electronically), the individual should retain all the documents relevant to the purchase and sale of the property and any documents or receipts regarding the payment of the foreign tax in the event that we ask to review them. An individual would not be required to have any documents or receipts translated into one of our official languages unless requested by us to do so.
A Canada resident individual is generally entitled to a foreign tax credit where the individual is subject to an income or profits tax paid to a foreign government on the sale of property situated in a foreign country. The foreign tax credit (which is a deduction against Canadian tax payable) cannot exceed the amount of the Canadian tax that is payable in respect of the sale of the property.
The CRA's International Tax Services Office (ITSO) handles questions regarding the application of our foreign tax credit rules. Therefore, if you have any questions as to whether a particular tax qualifies for the foreign tax credit or how to compute the foreign tax credit, we would encourage you to contact ITSO at 1-800-267-5177.
(b) Rental Income
Income earned by a Canadian resident individual from the rental of real property situated in a foreign country would be subject to tax in Canada. For information on computing the income from a rental property, see our guide, "T4036 - Rental Income" which can be obtained through our website (http://www.cra-arc.gc.ca) under Forms and Publications. A foreign tax credit would normally be available for any income or profits tax paid to the government of the foreign country in respect of the rental of the property.
If an individual converts personal-use property (i.e., property used primarily for personal use and enjoyment) to income-producing property (i.e., property used primarily to earn income), the individual would be considered to have disposed of the property and reacquired it at its fair market with the result that any accrued capital gain on the property would be realized. Whether or not a conversion has occurred in any particular case is a question of fact, however, we would not consider a conversion to have occurred simply because the property is rented occasionally provided that the business use of the property remains secondary to the personal use of the property.
The Income Tax Act imposes an obligation on Canadian resident individuals to disclose information regarding their foreign property holdings. The requirement to disclose foreign property holdings, which is done annually on Form T1135, should not be confused with the requirement to report any income or gains from property situated outside Canada.
An individual is required to file Form T1135 if the total cost of the individual's specified foreign property exceeds $100,000 Cdn. An individual's specified foreign property includes, among other things, foreign bank deposits, shares of non-resident corporations and real property situated outside Canada (other than personal-use property and property used exclusively in an active business). As we indicated above, notwithstanding that the foreign property reporting obligations may not apply to a particular property, such as a personal-use property, a Canadian resident individual would still be required to report any income from the property, or any gain realized from the sale or conversion of the property, in computing income for Canadian tax purposes.
We trust that our comments are of some assistance. If you have any questions, please contact me at 613-948-5274.
Yours truly,
Daryl Boychuk
Manager, International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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