With the world at our fingertips and more accessible than ever before, it has become quite common for Canadians to own foreign real estate, and for companies to carry on business in foreign jurisdictions. While such holdings may be greatly convenient and quite profitable, foreign real estate can be tricky when it comes to tax reporting. Failure to consult with a knowledgeable tax advisor to ensure compliance with the necessary tax reporting requirements could cause you considerable headaches, especially given the government’s current crack-down on overseas tax evasion.
If you have foreign holdings or foreign business activities, these three tips can help you avoid common traps that may result in a tax audit and financial penalties:
1. Report Worldwide Income
While you thought you might have paid foreign taxes on foreign earnings, the Canadian government still expects you to report worldwide earnings, whether or not they have already been taxed by a foreign government.
This also holds true for all income from foreign investments. Even if you have stocks that are held in foreign brokerage firms, you are expected to include foreign dividends on your Canadian tax return.
In addition to income reporting, Canada has foreign property disclosure requirements on prescribed information returns. Failure to file the required information returns can result in financial penalties.
What about vacation homes?
If you’re a ‘snowbird’, or if you own foreign real estate upon which you earn rental income, be sure to include any income from rental or lease of the property, and the proceeds from the sale of the property, on your tax return.
2. Comply with the Foreign Jurisdiction’s Reporting Requirements
It is important that you properly comply with the tax and reporting requirements of the foreign jurisdiction where you own real estate or are carrying on business.
Some countries have tax treaties with Canada, and the CRA will allow the taxes you have paid to the foreign jurisdiction to be credited against your Canadian taxes to avoid double taxation. In other words, mistakes may end up costing you twice the amount of taxes. Seek the advice of a knowledgeable and experienced tax advisor who is familiar with both the Canadian and foreign jurisdiction’s laws. This could help minimize your taxes and save you considerable inconveniences down the road.
3. Keep Extensive Records
Always be prepared for an audit by the tax authorities. Keep all documentation, especially relating to the ownership and value of the foreign holdings, the expenses incurred, the income earned, and the foreign taxes paid. This will not only help you in the case of a tax audit, but it is information that you will likely require for your own bookkeeping records.
Don’t take any chances when it comes to your foreign holdings or foreign business activities.
Make sure that your tax advisors have the knowledge, experience, and resources required to ensure you remain compliant with all local and foreign tax requirements. Remember the old adage: an ounce of prevention is worth a pound of cure.
As members of the Leading Edge Alliance, an association comprised of accounting and advisory firms from around the world, Fuller Landau has an extensive network of international advisors to assist with any foreign business activity. Coupled with our in-house team of skilled and knowledgeable tax advisors, you can rest assured that you’re in good hands.
Contact us today to speak with one of our international tax advisors about your foreign real estate holdings. We’re here to help.