By Cam McIntosh C.A.,CFP
Canadian residents planning to buy their piece of the sun have certain Canadian tax obligations on their real estate very similar to the individual purchasing similar property here in Canada.
Our Tax Department, commonly known as CRA, and the Income Tax Act it administers has provisions in it that obligates the Canadian resident to report income on a worldwide basis. This is not any different than most countries in the world. But with owning property outside Canada, you now bring in other tax jurisdictions wanting to know what you are up to in their country.
In this discussion, we will look at what the Canadian resident should take into account when owning property outside Canada, what tax obligations exist on that property.
The Real Estate investment decision is the same whether the property is in Canada or elsewhere. The buying, holding and selling decision is the same. So, let’s look at each stage of owning that foreign property and the tax impact using the Canadian tax system and a foreign tax jurisdiction. In these cases, I will use Portugal and Spain.
THE BUY DECISION:
|It’s best to seek the advice of professionals when dealing with tax issues in Europe.|
Canadian Residents are allowed to own property in any part of the world, depending upon the country involved. There are really no restrictions in most countries in purchasing property in their country, and in many cases they encourage it to keep a robust Real Estate market in their local economy.
Therefore, the purchasing decision is one of what is the use of the property (be it personal use and/or investment) and, most importantly, location, location, location.
THE HOLDING DECISION:
Part of the Real Estate decision is of the “Hold”.
Is the “Hold” to be for personal use only, or for rental, or both. This decision of “Holding” will bring in tax considerations from both countries, the home (your)country and the host (over there) country. I will talk firstly about the tax consequences of the Host Country as the income will initially be taxed there and will only be taxing the incomes sourced there.
Obviously, if we purchased the property to be used as a personal-use property, there will be no rental income, and therefore there will be no taxes due to either to Canada, or the Host Country, with the ongoing holding of that property.
In Spain, with owning rental property as a non-resident of Spain, maintaining your residency in Canada, you will be taxed on the rental incomes at a flat 25 per cent of the gross rents without any deductions. In Portugal, the taxation of the ongoing rental income is at a progressive rate on the net rental income. The Portuguese rates are similar to Canada.
Now, let’s look at the Canadian side of the tax situation. As Canadian residents we are required to report world income and pay the applicable tax on it, therefore we are obligated to report the rental operations from the foreign property.
The good news on that is that we are allowed to claim any foreign taxes as a credit against the foreign incomes reported on our Canadian tax return. So, effectively, we could wipe out any Canadian tax on that foreign income. In effect, we will not be doubled taxed on the rental income we receive from our foreign Real Estate income.
The biggest item that we have to consider as Canadian residents is the foreign-reporting rules that were brought in approximately 10 years ago. Any Canadian resident that has investments outside Canada has to complete an additional form in the annual filing of tax returns. Therefore, you have to disclose to the CRA, (via Form 1135) your foreign property holdings and report the incomes or losses resulting from that foreign property along with any foreign taxes paid.
A notable exception is the personal-use property that is a holiday residence. There are very strict penalties in failing to do so, and caution and professional advice should be sought in the area.
THE SELL DECISION:
The sell decision may result in a capital gain or a capital loss, depending upon the market at the time of selling. The rules for Canadians are straightforward, and we probably have encountered them in the past. But, quickly, the gain will be simply, what you received from the sale less what you paid for the property and the costs of selling, resulting in a gain or loss. A total of 50 per cent of the total gain is then known as a taxable gain and is added to your overall income, and taxed at that rate.
In Spain, selling the property will potentially result in a capital gain. Being a non-resident of Spain and a resident of Canada will put you into a tax category that is very well defined. Basically, any gain incurred in Spain will be a flat 35 per cent Capital Gain Tax on 100 per cent of the gain on the sale, no matter if it was a personal-use property or an investment.
With the reporting requirement in Canada of that transaction, you will be able to claim the foreign tax credit resulting in no tax in Canada on that sale. But you still must report it, whether is a personal-use property or investment.
In Portugal, you will be subject to a capital gain tax on the sale of your property, as a non-resident of Portugal. A total of 100 per cent of the gain is taxed at a flat rate of 25 per cent. Again, on the Canadian reporting side, the foreign tax credit will apply and probably end up with no taxes due to Canada as a result of the sale.
As you can see, owning property outside of your principal residence is basically handled in similar fashions in most countries, and there are obligations to each country that you would be investing in. My theory is that taxation should not be a major consideration in the buying decision, but has to be taken into account as it is inevitable. The key is location, location, location.
You should seek professional advice on these matters from someone that is fluent in your home country and the agents in the host country that are very familiar to the particular country in which you will be investing. Make sure that you take advantage of those professionals, as they will help you through the tax minefield.
Cam McIntosh C.A.,CFP, focuses on assisting Canadians working and retiring abroad for the last 20 years, and has been featured in local and national magazines. He has been awarded the prestigious “Advisor of the Year” twice for his knowledge in the International taxation area. He can be reached at firstname.lastname@example.orgFor more information:www.seekerscanada.com