Canadians who did not declare their real estate interests in the US should contact their tax professionals.
On July 8, 2020, the CRA published Request for Information (RFI) for Bulk United Stated (U.S.) Real Property Data (re Canadian residents) which, in simple terms, requests information from vendors of US real property data in bulk.
If you hold (or held) US real estate property and if are uncertain whether your prior tax filings were correct, now is the time to call your tax professional and fix any errors.
What kind of data is the CRA searching for and why?
According to the RFI, the CRA is interested in the U.S. real property data where "a Canadian resident is the owner or party to the purchase, sale, or transfer". Data is requested on "current and historical records, mortgage transactions, property taxes, real property records, and deeds" in bulk form.
The RFI is not an announcement of a tender to purchase the data just yet, its current goal is simply to gather information on data "industry best practices". However, once complete, we would expect that the RFI would be followed by a Request for Proposal where vendors of data would be invited to submit bids.
Once the CRA has access to the data, it should be able to identify Canadian residents who did not comply with their foreign income verification obligations and other tax rules.
In simple terms, we expect a surge in the so-called "T1135 audits".
What are "T1135 audits" and what are "foreign income verification" obligations?
Canadian residents who, at any time during the year, owned "specified foreign property" with a cost of more than CAD$100,000 must report details of the property on Form T1135.
"Specified foreign property" includes, generally speaking, various types of tangible, intangible, and real estate property outside of Canada, among others.
"Specified foreign property" does not include a property used exclusively in carrying on an active business or personal use property, among others.
As such, any Canadian residents who hold or held real estate property (other than personal use property or property used in an active business) in the US with a cost (not value) of more than CAD$100,000, may potentially have Form T1135 reporting obligations.
For example, a Canadian resident owner of a rental condo in Florida purchased for over CAD$100,000 must report the property on Form T1135. The specific relevant tax rules (and exemptions from the rules) can be quite complex. Please talk to your tax professional about your reporting obligations.
What are the penalties for failing to file or making a false statement on Form T1135?
The penalties can be quite significant.
The penalty for failing to file a return is $25 per day for up to 100 days (minimum $100 and maximum $2,500). This penalty applies, even if a taxpayer honestly but mistakenly believes that the foreign property does not have to be reported.
If a taxpayer failed to file Form T1135 knowingly or under circumstances amounting to gross negligence, the penalty is $500 per month for up to24 months (maximum $12,000), less any penalties already levied.
If, however, a taxpayer makes a false statement on their Form T1135 knowingly or under circumstances amounting to gross negligence, the penalty can be the greater of either $24,000 or 5% of the cost of the foreign property.
For example, if a Canadian taxpayer owns a US rental property with a cost of CAD$1,000,000 and negligently omits the property from his T1135 for 5 years, he can face up to $50,000 in penalties per year ($250,000 for 5 years) plus 5% to 6% interest.
I am not sure whether I properly reported my real estate property in the US. What do I do?
In light of the CRA's plans that can be inferred from the RFI, the CRA may receive data about your real property ownership in the US. If you are worried about your prior tax filings, now is the time to consult with a tax professional. There may be a way to correct your filings and to avoid the more serious penalties through the CRA's so-called "tax amnesty program" or Voluntary Disclosure Program.
If the CRA contacts you for an audit before you correct your prior tax filings, the Voluntary Disclosure Program won't be available to you and you may face the more serious ($12,000- $24,000 or higher/year) penalties.
At Advotax Law, we routinely help Canadian taxpayers who hold real estate and other property outside of Canada.
Call us at 437-916-9000 for a free no obligation assessment of your case.
Please note that this post is only as current as its publishing date indicates, but the relevant rules change constantly.
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