Canadian residents pay income tax on their worldwide income. In
an effort to crack down on unreported offshore income, the Canada
Revenue Agency (the “CRA”) recently announced that it
will start a cross-border investigation in the United States.
The investigation will look through the past six years’
worth of real estate transactions, from 2014 to 2020, in search of
any American “real estate and real property data where a
Canadian resident is the owner or party to the purchase, sale or
transfer.” CRA will seek information such as municipal
addresses, owner names, square footage, sales histories, and
property tax assessments.
CRA said in its notice, titled Bulk United States Real Property
Data Re: Canadian Residents, that “[t]his information will
enhance the Agency’s ability to administer tax programs and to
enhance the various tax Acts in order to protect Canada’s
revenue base and to support the Agency’s business and research
Lost tax revenue in the real estate sector has been a key issue
for CRA. CRA estimates that the amount of unpaid taxes in the real
estate sector is in excess of $1 billion. As we discussed in our
previous blog post, CRA’s $1 Billion Real Estate Nut: Tough to
Crack, CRA has become increasingly aggressive in its real
estate audits in the last five years.
In its endeavour to identify and tax Canadians’ worldwide
income, CRA has authority, through Canada’s tax treaty with the US, to seek assistance
from our neighbour south of the border.
Canadian taxpayers who are ultimately discovered and reassessed
as a result of this upcoming investigation can face significant
penalties and interest. For instance, a taxpayer who has knowingly
failed to disclose foreign property worth over $100,000 on a T1135
form may be subject to a penalty equal to 5% of the cost of that
property, if the form is overdue by more than 24 months. These
penalties can accumulate quickly if the failure to file, for
example a T1135, occurred for a number of years.
Concerned taxpayers with unreported income may consider
proactively disclosing their information to the CRA before any
reassessment, through the CRA’s Voluntary Disclosure Program.
That program has two tracks: (1) the General Program and (2) the
Limited Program. The General Program provides greater relief from
penalties, interest, and criminal prosecution. The Limited Program
provides limited relief where there is an element of intentional
conduct on the part of the taxpayer. Taxpayers will not face
criminal prosecution nor be charged gross negligence penalties, but
will be charged other penalties and interest.
CRA considers several factors in deciding which of the two
tracks is suitable, including whether the disclosure was only made
after a CRA statement regarding its intended specific focus of
compliance (for example, the launch of a compliance project).
Accordingly, now that CRA’s announcement has been made about
its US investigation, voluntary disclosure applications regarding
real estate in the US may be caught under the Limited Program.
Whether you are seeking proactive assistance in filing a
voluntary disclosure with respect to unreported income or property
outside of Canada or if you have already been contacted by
CRA’s audit division, the specialists at TaxChambers LLP can
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.