Renting or selling property outside Canada: Canadian tax

Do I report rent from a property abroad if the money stays there?

Yes. A Canadian tax resident reports income from property abroad for the period they are resident in Canada, whether they transfer the rent to Canada or leave it in a foreign account (CRA: newcomers).

For a US property, see rentals on both Canadian and US returns. Form T1135 is a separate information return: see foreign property reporting for whether your property needs it.

Canadian residence starts the worldwide-income obligation; the property's location and the account holding its rent do not change that. If you moved during the year, report foreign rent earned during your Canadian-resident period. See your first Canadian resident return for the rest of that year's income (CRA: newcomers).

How do I report foreign rent on Form T776, and in which currency?

If your rent is income from property, report gross rent and expenses in Canadian dollars on Form T776. Carry gross rent from its line 8299 to return line 12599, and net rental income or loss from line 9946 to return line 12600. If you co-own it, report the whole property's gross rent on return line 12599 but only your share of the net result on line 12600 (Form T776; CRA: Rental Income). Substantial tenant services, such as cleaning or meals, may instead make this business income reported on Form T2125 (CRA: rental or business income).

Use the Bank of Canada rate for the relevant day, or the closest preceding quoted day. The CRA may accept an average rate for recurring income when exchange rates do not fluctuate significantly; a sale or one-time improvement calls for its own date's rate (CRA: Income Tax Reporting Currency). Keep a schedule that ties the foreign amounts to the Canadian-dollar entries.

Can I deduct expenses and depreciation on a property abroad?

Generally, a Canadian resident can deduct reasonable expenses incurred to earn rental income from a property abroad under the usual rental rules. Capital cost allowance (CCA), Canada's depreciation deduction, may be claimed on the building but not the land; it cannot create or increase an overall rental loss (CRA: Rental Income).

Personal use reduces deductible expenses. A cost-sharing arrangement without a profit purpose may not produce a deductible rental loss. CCA is optional, and a later sale can bring previously claimed CCA back into income as recapture (CRA: Rental Income). For the building's CCA class, see capital cost allowance.

How do I avoid paying tax twice on foreign rent?

Foreign income tax paid on rent reported in Canada may qualify for a foreign tax credit, generally limited by Canadian tax on that income. Annual property tax on a rental is generally an expense instead, for the period it was available for rent (CRA: foreign tax credit; CRA: Rental Income). Keep proof of foreign income tax paid. See foreign income on a Canadian return for the federal, provincial and Quebec calculations.

What is my cost base if I owned the property before moving to Canada?

For property outside Canada that you owned when you became a Canadian tax resident, the Canadian cost is generally its fair market value at that time. The immigration rule treats you as selling and immediately reacquiring that property at its fair market value, so an earlier foreign purchase price is usually not the starting Canadian cost for a later gain (Income Tax Act, section 128.1; CRA: newcomers).

Get evidence of the property's value near the date Canadian residence began, with separate values for land and building if it is a rental. Record the Canadian-dollar value using the rate for that date. Later capital improvements add to the relevant property's cost; ordinary repairs do not (CRA: Income Tax Reporting Currency; CRA: Rental Income). A returning resident or unusual ownership history can change the calculation and needs review.

What if I inherited or was given the property abroad?

Receiving most gifts and inheritances is not itself taxable income in Canada; later rent and a taxable sale are different (CRA: amounts not taxed). An inherited or gifted property's Canadian cost is generally its fair market value when you acquired it, subject to exceptions such as certain transfers from a spouse or common-law partner. Keep the inheritance documents or gift deed and a valuation for that date (Income Tax Act, section 69; CRA: special transactions).

Work through the dates in order: acquisition by inheritance or gift, any later move to Canada, then sale. If you owned the property when Canadian residence began, the immigration fair-market-value rule may reset its Canadian cost again. The foreign estate's or donor's tax treatment does not by itself set your Canadian cost (Income Tax Act, section 69; section 128.1).

How is a sale of property abroad taxed and reported in Canada?

For a capital property sold while you are a Canadian tax resident, calculate the gain in Canadian dollars: sale proceeds less adjusted cost base (generally its Canadian purchase or deemed cost plus eligible acquisition costs and improvements) and selling costs. Report the sale on Schedule 3, even if the proceeds remain abroad; a taxable capital gain goes to line 12700. A rental building can also trigger CCA recapture on Form T776 (CRA: Completing Schedule 3; CRA: Rental Income).

Report land and a rental building separately on Schedule 3. A personal-use property's loss is generally not deductible. A depreciable rental building cannot produce a capital loss, but a terminal loss may be deductible if its CCA class has a positive balance and no property left (CRA: Completing Schedule 3). Foreign currency can change the Canadian gain even if the foreign-currency price barely changed. A mortgage balance does not reduce the property's gain; repaying a foreign-currency mortgage may create a separate exchange gain or loss, so keep its borrowing and repayment records (Income Tax Act, section 39(2)).

For a US sale, see selling US real estate as a Canadian for withholding and US returns.

Can a home abroad qualify for the principal residence exemption?

Yes. A home abroad can qualify for a year you were resident in Canada if you owned it, designated it, and you, your current or former spouse or common-law partner, or your child ordinarily lived in it. A parent living there alone does not meet your occupancy test. Your family generally cannot designate another home for the same year (CRA: Principal Residence).

If you sell a home that was your principal residence at any time, complete Part 2 of Schedule 3 and Form T2091(IND), even if the exemption covers the full gain. Attach the form to a paper return; keep it if you file electronically (CRA: principal residence reporting; Form T2091(IND)).

The exemption formula counts qualifying designation years during which you were a Canadian resident. Its extra year depends on whether you were resident in the year of the relevant acquisition or deemed reacquisition. A home bought before immigration can be deemed reacquired on arrival, so check that date before applying the formula (Income Tax Act, section 40; section 128.1; CRA: Principal Residence).

A property mainly held to earn rent generally does not qualify merely because you stayed there briefly. A change between home and rental use may cause a deemed sale. A signed subsection 45(2) election for home-to-rental use goes with the return for the change year; a signed subsection 45(3) election for rental-to-home use goes with the return for the eventual sale, or earlier if the CRA demands it. Claiming CCA ends a 45(2) election and can bar a 45(3) election. See turning a home into a rental for the rules, and the principal residence exemption for designating years (CRA: Principal Residence).

Example

Illustrative only. All amounts are Canadian dollars; assume the property is a capital property and no principal residence exemption applies.

An owner paid C$220,000 for a rental abroad before becoming a Canadian tax resident. Its fair market value on arrival was C$300,000, including C$100,000 for land and C$200,000 for the building. After arrival in the first resident year, C$24,000 rent less C$9,000 deductible expenses gives C$15,000 net rental income before CCA on Form T776. Return line 12599 shows C$24,000 gross rent and line 12600 shows C$15,000 net income. Keeping the rent abroad does not defer reporting.

In the following year, the owner sells for C$360,000: C$120,000 for land and C$240,000 for the building. Selling costs are C$10,000, split C$3,000 and C$7,000. With no later improvements or CCA, the separate Schedule 3 gains are C$17,000 for land (C$120,000 less C$100,000 and C$3,000) and C$33,000 for the building (C$240,000 less C$200,000 and C$7,000). The total gain is C$50,000. The earlier C$220,000 purchase price is not the Canadian starting cost. Any foreign tax credit needs its own calculation.

Different for you?

• The property is in the US: use US rental property for annual filings and selling US real estate for a sale.
• You are unsure whether you are a Canadian tax resident: start with Canadian tax residency.
• You recently moved to Canada: see your first resident return and gather the deed, immigration date and arrival-date valuation.
• You inherited the property, changed its use, claimed CCA or repaid a foreign-currency mortgage: gather the inheritance or gift documents, valuations, rental returns and loan records before seeking tax preparation.
• You are a US citizen: see US tax on property abroad.
• You missed rent, a sale or foreign-property reporting: see unreported income and voluntary disclosure and foreign property reporting.