The CRA and US Real Estate Transactions
On June 25, 2020, the CRA announced it will undergo an extensive review of U.S. real estate transactions over the past six years to find any tax non-compliance from Canadian taxpayers. The CRA plans to look through real estate and property data of Canadian property transactions in the States. Reassessment through this upcoming audit could mean that Canadian taxpayers are facings serious penalties and interest if found non-compliant. There is also a chance that you could be facing prosecution for tax fraud or tax evasion.
Many issues will be reviewed by the CRA during these tax audits, especially when there is undisclosed real estate property or unreported real estate transactions. As a Canadian Taxpayer who owns property in the States, you should be aware of these potential issues and how you can potentially get ahead of the taxman.
Unreported Foreign Property
One of the issues that the CRA could be looking for is whether the T1135 Foreign Income Verification Statement for a foreign property has been complied with and filed properly annually. This reporting requirement requires Canadian taxpayers who own or hold in trust a foreign property with a value of over $ 100,000 to disclose the property on their tax returns. There are some exceptions to reporting these properties but if you are earning income from the property, it generally must be reported. The definition of property is very vast. If it’s something that has value, it is probably included in the definition.
Unreported Rental Income
Canadian tax residents are generally required to declare and report their worldwide income. To avoid paying taxes on the same income in two different jurisdictions, the Income Tax Act uses the Foreign Tax Credit mechanism to avoid double taxation. For Canadian taxpayers who generate rental income from a U.S. property, he or she is required to report that income to the CRA. However, if the taxpayer fails to disclose that income to the CRA, he or she may be subject to a reassessment and will be met with heavy penalties, and interest, even if the taxpayer has already paid taxes to the U.S. government.
The reason for this is because Canadian tax rates are higher than U.S. rates. So if you’re only reporting the income to the U.S, you are paying most of the tax, but not all.
The upcoming CRA tax audits will most likely involve auditors looking for any unreported U.S. rental income from Canadian taxpayers.
Unreported Real Estate Sales
Finally, the CRA will examine U.S. real estate sales of properties owned by Canadian taxpayers. Generally, proceeds of the sale of a property are subjected to taxation as either income or capital gains by the CRA, unless the sale falls under the principal residence exemption. This means that if you sell your U.S. property, you need to report the proceeds of the sale to the CRA since the amount is likely fully taxable.
If you have not reported the sale, you are subject to audit, and the assessment of penalties and interest. It is even possible that you are charged criminally for tax evasion. This normally depends on the level of the evasion and the amount of tax you have not paid.
The most frustrating part of this audit is that the CRA will normally assess these property sales as income instead of capital gains. This doubles the amount of taxes owing in most cases. There are ways to fight this, of course, but it is a frustrating position to be in.
CRA and US Real Estate – Can I Fix Things?
The CRA offers the Voluntary Disclosure program, where Canadian taxpayers can disclose their previous errors or omissions such as; unreported income, unreported real estate sales transactions, and unreported foreign property. The benefit of the program is the potential to avoid criminal charges, penalties and you may receive a large break on the interest charged.
However, there are specific criteria that need to be met; one being that the CRA has no existing knowledge of the mistake and that you are coming forward voluntarily. A timely voluntary disclosure application could be the way to avoid not just penalties and interest, but also avoid prosecution for tax fraud or tax evasion.
If you are a Canadian taxpayer with property in the U.S and have any concerns around your U.S. real estate tax issues, now is the time to contact our experienced Tax Lawyers. At R&A Tax Law we have the experience and the expertise to help you with your U.S. real estate tax issues. Call us today to learn more!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.