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 a 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.
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.
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.
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.