Canada is a country having vast immigrant population. Every year new immigrants come to Canada and gradually achieve their immigration status as permanent residents and ultimately Canadian citizenship. If you are a new permanent resident or a Canadian citizen, you may at some point inherit some property from a foreign deceased relative. It is important to know Canada’s inheritance tax rules if you inherit such a foreign property in your assets. Not knowing the rules may cost you dearly if you decide to skip reporting these properties.
In this post, we are going to refer to individual taxpayers who have inherited foreign property.
Disclaimer: This article is for a quick reference for those seeking information on foreign properties acquired through inheritance. This is not tax advice and cannot be a basis for any decision making. Foreign property taxation is a complex topic that usually needs a face to face discussion with your personal income tax accountant in Canada. Further, this article is not updated after being posted.
Let’s look at some of the common questions you may have if you have inherited a foreign property:
Is there any inheritance tax in Canada?
If you have inherited a property in Canada, there is no tax on it! Canada does not tax its residence on the inheritance. There is a deemed disposition of the property at the time of the death of the deceased and fair market value is fixed at the property in the process.
What are the types of foreign properties?
Subsection 233.3(1) of the Income Tax Act in Canada includes both tangible and intangible properties under the “foreign specified property”.
Some of the foreign specified properties include:
- Copyrights and patents (intangibles)
- Shares: Owning shares in a non-resident corporation or owning shares of a resident corporation held outside of Canada
- Interest in a foreign insurance policy
- If you paid consideration to acquire an interest in a non-resident trust.
- Any debt owed by a non-resident
- Tangible foreign property
- Precious metals
- Real estate outside Canada (there is an exception for personal use property)
- A convertible property giving you the right to acquire a foreign specified property
Exceptions to the specified foreign property include; property used in active business income, holding shares of a foreign affiliate or debt owed by it, trusts exempted under subsection 233.2(1) of ITA, personal use property, and interest or right to acquire these excluded properties.
For more details on the specified foreign property, please visit the link here.
Real estate in some cases is considered a specified foreign property. There is a personal use property exception. To explain this we can have a look at an example. You inherited a cottage in France left by one of your relatives. If you use this cottage to live there while visiting France, it is a personal-use property. If you rent this cottage out, you must report this property and include any of the rental income in your individual income tax return in Canada.
What is the difference between direct inheritance or a foreign property inherited through a trust?
Direct inheritance is when the funds are transferred directly to you. In many cases, the foreign property is transferred from the foreign estate of the deceased. The foreign estate is a trust and the property received from it has certain reporting requirements. In a direct inheritance, you do not have to file additional forms but in case of inheritance through a trust, there are additional reporting requirements.
What is the Cost of inherited foreign property?
The cost of inherited property is the fair market value at the time property was transferred to you. This is important to keep track of this cost since it serves as the beginning adjusted cost basis of that property for you. You need this to report capital gains at the time you dispose of this property.
When are you required to file form 1142?
If you receive the foreign property through a foreign estate of deceased, you must file form 1142. There are steep penalties for not filing this form on time.
More information on T1142 can be found here.
When are you required to file form T1135?
Foreign income verification statement, also known as form T1135, is required to be filed if you hold foreign properties and the cost of such properties exceed $100,000 at any time during the year. You must file this form by the due date of your personal income tax return in Canada. Not filing this form can result in serious financial penalties and, in some cases, gross negligence penalties as well.
What happens if you have inherited foreign properties having cost more than $100,000 but forgot to file form T1135 on time?
You may have done so either due to unawareness or the non-compliance might be intentional. There are steep penalties and consequences for non-compliance. If Canada Revenue Agency has not initiated any contact with you yet, you can file pending T1135 under Voluntary disclosure program. You are recommended to contact professional tax service provider in Canada to discuss your compliance requirements.
How to report foreign income from real property?
If the foreign property is generating income, you must report this income in your individual income tax return in Canada. Canada taxes its residents on worldwide income. If you have already paid taxes to a foreign country, you might be entitled to foreign tax credits.
Read: Reporting foreign rental income in Canada.
Do I need to get the appraisal for foreign inherited property?
You are recommended to get an appraisal for the foreign inherited property to determine its fair market value at the time of inheritance. This fair market value serves as a cost of the inherited foreign property. You need adjusted cost basis to determine the capital gain when you dispose of your foreign property.
Need assistance with figuring out personal income taxes with foreign properties? Contact us and we can help you understanding and achieving compliance.
Maroof HS CPA Professional Corporation is a CPA firm in Ontario, Canada. We specialize in individual income tax service, corporate tax services, accounting services and business planning in Canada for both residents and non-residents.
14 thoughts on “How is foreign inherited property taxed in Canada?”
Hello. My mom, a Canadian citizen, needs to transfer the proceeds from the sale of an inheritance property in India. All capital gains have been paid and tax filed in India. Is the amount taxable in Canada? Any insight or clarification would be sincerely appreciated. Thank you.
Canadian tax residents do not have to pay taxes on receiving inheritance or gifts. You, however, should consult your accountant.
Hello, My father passed in 2019 and has a developing house for me in Toronto but I am not a Citizen Noor and Permanent Residents I live in the US
Sorry to hear about that. Generally, the lawyer who is handling estate will be able to help on this one.
In January 2021 my mother is passed way in Portugal and I get is house from heritage in November 2021 I sold this house because I am resident and citizen in Canada and my residence is in Canada I need to now ere I declare the tax because have one trade from canada and Portugal.
I have reunited in Canada with my wife, and we already have Canadian nationality. We proceed to the sale of the property registered in the headquarters under art.979 “G” of the parish and municipality of Odivelas and declare the sale in Canada. However we were notified to deliver the mod. 3 and Annex G in Portugal what we have already done. However, there is a convention between the Portuguese State and the Canadian State to avoid double taxation as I quote: PRESIDENCY OF THE REPUBLIC Decree of the President of the Republic No. 57/2000 of 6 December 1 — The current taxes to which these Convention apply are: a) For Canada: Income taxes required by the Government of Canada under the Income Tax Act (hereinafter referred to by the designation ‘Canadian tax’); (b) for Portugal: (i) Personal income tax – IRS; ASSEMBLY OF THE REPUBLIC Resolution of the Assembly of the Republic n. 81/2000 APPROVES, FOR RATIFICATION, THE CONVENTION BETWEEN THE PORTUGUESE REPUBLIC AND CANADA TO AVOID DOUBLE TAXATION AND PREVENT TAX EVASION IN MATTERS OF TAXES ON INCOME AND ITS PROTOCOL, SIGNED IN Ottawa ON JUNE 14, 1999.
What I need to declare this sale in Canada.
Hi Carlos, I recommend seeking an advice from some accountant. In general, inheritance is not taxed in Canada for the receiving party. If you inherited the property, it should not be taxable in Canada. You should, however, determine the fair market value of the same property. This FMV will become your ACB for the purpose of calculation of capital gains when you dispose of the same property. For other details mentioned by you, you should speak to some Accountant in Portugal.
Hello, My in-laws passed away few years ago, now we sold their house in India and money will be divided among three children, my wife being one. Please note that we are a citizen of Canada (acquired by migration).
1. How can we bring my wife’s share of money to Canada? Any paper work?
2. Is this inheritance money taxable?
Sarabjeet, inheritance is not taxed in Canada. Bringing money to Canada, we can’t comment about that process you will have to check with your receiving bank. At time of tax return preparation, give all the facts to your accountant to decide the right reporting obligation. Also Canadian citizens have requirements only if they are Canadian tax residents. For non resident Canadians, only Canadian sourced income is taxed.
Hello, we are planning to sell farm land of my deceased father, which were never transferred to our name, and bring the money back to Canada from India. Do we need to report it? We don’t know the cost of the land when father acquired 80 years or so back, can you help?
Reza, reporting and paying taxes are two parts. If the farmland was generating the income, you need to report and pay taxes on that income. Depending on the nature and the cost of your asset, you may have to file T1135. However, inheritance is not taxable in Canada at the time property was transferred to you. If you sell your inherited property, there will be a disposition. Capital gain is Sales proceeds less FMV at the time of inheritance less selling expenses.
good day. we have just sold my inherited house in Switzerland all taxes are paid in Switzerland and I am a dual Citizen, Swiss and Canadian and I live in Canada. both countries have a tax treaty to avoid double taxation. so far nobody is able to tell me IF I have to pay taxes in Canada when the money arrives and HOW do I report it ? I never gained any money from that property JUST now is a sum left after paying lawyers, the mortgage, the seniors home of my mum and the taxes in the canton (province of Switzerland). What should I do ? call CRA ?
If you sold an inherited house, you have to report the disposition on tax return, apply appropriate foreign tax credits. Since the money will be most likely sitting in some bank account, T1135 might be applicable. Bringing money is not a taxable event, the disposition is.
I inherited a UK property in 2007 from a parent in the UK. I am domiciled and a resident of Alberta.
It has been used for personal use and no UK income was ever derived from the asset.
I am planning on selling it this year 2023.
I will be paying UK capital gains tax on disposal I understand.
Since it has been inherited personal property, the CRA told me back then that I need not declare it unless income is derived from the property. I have asked the CRA at least a couple of times over the years on this declaration issue and was told the same by two different CRA reps.
I expect to pay Federal Tax and Alberta tax and then claim a foreign tax credit on the capital gain derived from the adjusted cost base i.e fair market value at the date of inheritance in 2007.
I have read that if the Fed tax credit is insufficient to offset the UK tax paid, I can claim the provincial tax credit as well.
Am I thinking right so far ?.
Peter, your understanding seems to be mostly correct! Taxes paid to foreign countries will be first applied towards Canadian tax payable at the federal level, and then to the provincial level (leftover).