Failure to file a T1135 can result in harsh penalties, even when the income from the foreign property has been reported
If you own U.S. real estate, whether for personal use or for investment purposes, now may be a good time to ensure that you’re fully compliant with your Canadian tax filing obligations, as it appears that the Canada Revenue Agency may soon be doing some mass sleuthing of publicly-available U.S. property records.
In a Request for Information (RFI) posted online on June 25 entitled “Bulk United States (U.S.) Real Property Data (re Canadian residents),” the CRA announced that it is looking for a provider to supply the Agency with U.S. real property data. In the RFI, the government stated that it is specifically looking for “U.S. real estate and real property data where a Canadian resident is the owner or party to the purchase, sale, or transfer. Real estate and property data is required in bulk form in order to identify current and historical records, mortgage transactions, property taxes, real property records, and deeds.”
The RFI goes on to say that the requested information “will enhance the CRA’s ability to administer tax programs, to enforce the various Tax Acts in order to protect Canada’s revenue base, and to support the CRA’s business and research processes.”
While I try to keep on top of Canadian tax developments, I confess that I do not regularly follow new postings on Buy and Sell, the online Public Works and Government Services procurement site. Rather, I was tipped off to the CRA’s novel request by a recent article by Toronto tax lawyer David Rotfleisch.
Rotfleisch, a certified specialist in taxation, told me in an interview that he was “fascinated by the out-of-the-box thinking by CRA…. There’s obviously some very clever people there on a strategic basis.” Rotfleisch acknowledged that the CRA has, in the past, launched a variety of real estate audit projects, such as going to condo developers and to registry offices to seek out information. “But to expand it to the U.S. is brilliant and really innovative,” Rotfleisch told me. “I am really impressed by whoever at CRA came up with this…. Really, hats off to them.”
In the RFI, it was stated that the CRA would be carrying out a tax review of six years of U.S. real estate transactions in order to find any tax non-compliance by Canadian taxpayers.
In his article, Rotfleisch warns that Canadians who are non-compliant could potentially be reassessed by the CRA as a result of the info it seeks to obtain, and be hit with substantial tax, penalties and interest, as well as face professional and legal fees required to respond and object to such a tax audit. He also warns of the possibility of prosecution for tax fraud or tax evasion.
Let’s review a few areas that may be on the CRA’s radar for review, should it be successful in obtaining bulk U.S. property records.
Unreported foreign property
Regular readers of this column will no doubt be well aware of the requirement to file CRA Form T1135 to report foreign property with a cost of more than $100,000 at any point in the year. While foreign property for this purpose does not include personal use property, meaning that you don’t have to report your Florida condo if it’s solely used as a vacation home and isn’t rented out, if you own foreign commercial property or a rental property, then the details of that property must be reported on the form.
Failure to file the T1135 can result in harsh penalties that can be assessed by the CRA, even when all the income from the foreign property has been reported. The penalty is $25 for each day the form is late, up to a maximum of $2,500 per tax year, plus non-deductible arrears interest.
You may recall a 2018 T1135 case involving a taxpayer who moved to Canada with her husband and three children. She and her husband jointly own a rental property in Michigan, which was their former family home prior to the move. Because of the value of their co-owned home, they were both required to file T1135s. Her husband was aware of this and filed his T1135 with his tax returns for the years in question. He included the rental income from the property on his tax returns.
The taxpayer, however, had no taxable income in 2011 and 2012 and she was therefore not obligated to file tax returns. The taxpayer, therefore, logically, but incorrectly, believed the T1135 filing requirement did not apply to her. In 2014, the taxpayer decided to file tax returns for 2011, 2012 and 2013 to claim child benefits for her kids. Along with her returns, she filed the T1135 form for each year.
CRA confirmed no tax was owing but assessed late-filing penalties of $2,500 for each late T1135, plus arrears interest, for a total of $5,541.
The taxpayer twice applied for relief, but was denied by the CRA and took the matter to Federal Court, where a judge concluded that the CRA’s decision not to grant full relief for the 2011 tax year was “unreasonable,” sending the matter back to the CRA for reconsideration by a different officer.
Unreported U.S. rental income
Canadian resident taxpayers are required to report, and pay tax on, their worldwide income, which includes foreign rental income. Generally speaking, a foreign tax credit is available to ensure that such rental income, which may also be taxable in the other jurisdiction, is not taxed twice.
If you own a U.S. condo or vacation home and regularly rent it out, then you have an obligation to report that rental income on your Canadian tax return. Failure to do so means you could be reassessed, and subject to tax, penalties and interest levied by the CRA, even if you paid U.S. taxes on such income.
Unreported U.S. real estate sales
Finally, the CRA will likely be looking into sales of U.S. residential properties owned by Canadian taxpayers to ensure any capital gain is being reported on your Canadian return. Again, while a foreign tax credit is generally available for any U.S. capital gains tax paid, foreign exchange movements in recent years may mean some extra Canadian tax. For example, if you bought your Florida condo for US$100,000 in 2012 when the U.S. dollar was at par with the Canadian dollar, but you sold it in 2019 for the same amount when the foreign exchange rate was 1.33, you could have no gain for U.S. tax purposes, but a $33,000 gain to report in Canada, with no offsetting foreign tax credit.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.
Toronto real estate market is headed for a cliff – NOW Magazine
Condo supplies in Toronto will help drive home prices down further
Toronto real estate prices are headed for a cliff. The condo market will drag it further down according to the Canada Mortgage and Housing Corporation (CMHC).
“Anticipated increases in the supply of condominium apartments will lead to softening prices next year,” says the CMHC in an email to NOW.
Toronto home prices hit an all time high in June. But the CMHC has been warning that those prices will begin plunging in the fall. Unemployment and low immigration due to the COVID-19 pandemic are two main factors.
According to the CMHC, the lack of demand for oil on a global scale is another factor. Restricted mobility during the pandemic is leading to falling oil prices. That will further exacerbate the impact on oil-producing provinces and Canada’s economy. Extended mortgage deferral deadlines, lower mortgage rates and government stimulus packages are all meant to soften the blow.
Increase in Toronto real estate supply
According to the Canadian Bankers Association (CBA), more than 760,000 Canadians have opted to defer their mortgages or skip payments. That’s about 16 per cent among those with mortgages in bank portfolios.
There will be an increase in Toronto real estate supply from homeowners who can no longer defer mortgages. That supply will couple with inventory from the condo market fuelled partly by short-term rental restrictions during the pandemic.
“More units could also sit on the market longer as more buyers wait on the sidelines,” the CMHC says. They attribute that decline in demand to job losses and general financial uncertainty.
“A significant number of condominium units under construction (54,000 units currently) will make its way to the resale pool and will further increase supply.”
Condo rental market
The Toronto Regional Real Estate Board (TRREB) is reporting how hard the condominium rental market got hit in the year’s second quarter. According to TREBB, GTA realtors reported 7320 apartment rentals in Q2, which is down 24.8 per cent from the same time last year. Meanwhile, the number of rental listings were up by 42 per cent from last year.
“There are two key take-aways from the Q2 2020 rental market statistics,” says TRREB president Lisa Patel in a statement. “First, COVID-19 clearly impacted the demand for rental condominium apartments, due to restrictions on showing units and job losses across many sectors of the economy. Second, we saw the continuation of the pattern experienced over the past year, with year-over-year growth in rental listings far outstripping growth in rental transactions.”
Average condo rental prices also dipped to $2,083 for a one-bedroom and $2,713 for a two-bedroom.
“Increased choice led to more negotiating power for renters, resulting in year-over-year declines in average rents in the second quarter of 2020,” says TRREB’s chief market analyst, Jason Mercer, in a statement.
Home owners can no longer use Home Equity Line Of Credits as down payments on investment properties. WE Realty broker Odeen Eccleston tells NOW that the new CMHC rule will reduce the pool of potential buyers.
Re/Max Hallmark Realty broker Meray Mansour adds that declines in condo demand will be felt more outside of the central core. She says highly saturated areas like Yonge and Eglinton are also vulnerable. Mansour adds that COVID-19 is forcing people to spend a bulk of their time indoors while trying to keep social distance, so elevators and a lack of outdoor space has made condos less appealing.
However, the average condo sale prices still managed to rise by 5.1 per cent year-over-year to $619,707 in Q2, according to TREBB. That increase occurred while listings were down 21.6 per cent and sales dropped 50.8 per cent year-over-year.
TRREB has also reported that city council has approved a plan to create more housing opportunities in Toronto. TRREB is specifically pursuing options that fall between detached and semi-detached homes and condos.
Toronto real estate right now
Odeen Eccleston has observed an exodus from the city inspired by COVID-19. People who are working from home are now swapping out their expensive Toronto real estate for cottage country.
“They can get so much more for so much less in a lot of these cottage countries,” says Eccleston.
But for now, Eccleston and Mansour say the heat is still on in the Greater Toronto real estate market.
“In the 905, especially in the below $700K price range, its still on fire,” says Eccleston.
“I’ve even sold a few condos with multiple offers in the Beaches and surrounding areas,” Mansour adds. She notes that some condos remain appealing despite the trends. “In areas like the Beach and Leslieville, or places where condos are more low-rise loft or boutique style, the demand is still there. Especially condos with really large terraces.”
Both realtors are cautious of the impending downturn. However, they wonder if Toronto’s real estate market can whether it better than expected. For now, they’re telling sellers to be safe and act now before we reach that cliff.
Calgary Real Estate Board trains its focus on market conditions – TheChronicleHerald.ca
That light we see in Calgary’s housing market tunnel is, unfortunately, not the end of the tunnel.
It’s yet another train, but it’s slowing down, according to the Calgary Real Estate Board’s (CREB) Q2 2020 Quarterly Update Report.
“Calgary housing sales slowed by 35 percent compared to the previous year,” says the CREB report. “This is better than original expectations, thanks to June figures that were far stronger than initial estimates. The pullback in new listings in the second quarter caused inventories to trend down, preventing a more significant decline in prices. The second-quarter benchmark price trended down compared to the first quarter and eased by 2.3 percent compared to last year, just slightly above initial forecasted levels.”
So, yes, that’s still a train a-coming, but, “the extent of the impact may not be as severe as estimates from three months ago. Those original estimates of unemployment levels and job losses have been revised. Job losses and high unemployment rates are still expected, but the magnitude of the decline has eased,” says CREB.
“Furthermore, since May, oil prices have improved. This is not enough to change capital spending plans, but with West Texas Intermediate prices back in the $40 range, the situation has improved significantly from the low levels recorded in May.
“While the situation may look brighter than it did a few months ago, it is also important to note that challenges remain. Our local economy is still facing record-high unemployment rates, with significant job loss occurring not only in areas associated with the shutdown (e.g., accommodation and food, retail trade) but in our professional, scientific and technical services sector. Some of the jobs in areas impacted by closures will start to return as our economy re-opens, but the challenges weighing on the energy sector will likely have a lingering effect on employment.”
Any kind of market weakness and uncertainties are obviously going to pose downside risks to housing demand, especially in the upper end of the market, says CREB.
“Recovery for higher-paid positions will likely take longer than recovery in other areas of the economy. This will cause some persistent challenges for the upper end of the housing market, having a greater impact on those higher-priced homes versus product in the lower price ranges,” says the report. “Overall, we continue to expect city-wide benchmark home prices to ease by just under three percent this year and sales activity will remain weak compared to the already low levels recorded last year.”
Despite the wide range of expectations on home prices, CREB does not expect a stronger price decline in 2020 for several reasons:
• Adjustment in supply. Demand has fallen, but so have new listings and inventory levels. This is preventing significant gains in the months of supply slowing the downward price pressure.
• Support provided by lenders and government is expected to cushion the blow from COVID-19, preventing a more significant price drop this year.
“As we move into the second half of this year and into 2021, there remains significant downside risk. If jobs do not return as anticipated and the support from lenders and government ends, we could start to see a faster rise in supply relative to demand. This may cause stronger price declines in the market entering 2021.”
Calgary’s housing market cooled slightly in July from the previous month’s activity, but June was an unexpected and pleasant surprise, says Jesse Davies, founder and realtor of the Jesse Davies team at Century 21 Elevate Real Estate.
“June surpassed a lot of people’s expectations with the detached market seeing a decrease of 21 percent in active listings from this time last year, which in turn has made for a slim-pickings type of market for buyers eager to take advantage of suppressed pricing and low interest rates,” says Davies, adding there was an incentive to buy before the end of June. “The new lending rules implemented by Canada Mortgage and Housing Corporation on insured mortgages also contributed to the better-than-expected June stats, as buyers rushed to purchase before the July 1 deadline.
“July is trending very similar to June with total sales volume up around five percent compared to last year. The balance of the summer and fall should see similar results and a lot will depend on interest rates staying unchanged, if we experience a second wave of the virus and what unemployment levels taper off at.
“One thing to consider is the net migration and immigration to Calgary, basically coming to a standstill for the last quarter due to travel restrictions from COVID and what type of short- and long-term ramifications this will have on demand and pricing.”
Here are Calgary market stats, comparing July to June this year and July to July last year (based on figures current as of July 27 each year, courtesy of CREB).
July 27, 2020
July 27, 2019
Copyright Postmedia Network Inc., 2020
N.B. housing market 'blew up' during COVID-19, real estate board says – CBC.ca
New Brunswick’s housing market is alive and well, despite being in the midst of a pandemic.
According to the Canadian Real Estate Association, 1,230 houses were sold across the province in June — a 25.4 per cent increase from last year and the highest level for any month in history.
“Right now we are experiencing a market in the past two months, like no other,” said Sharon Watts, executive officer for the Real Estate Board of the Fredericton Area, Inc., which extends as far as Perth-Andover, Oromocto and surrounding areas.
In June, the Fredericton area saw an increase of 53 per cent on house sales compared to last year. The northern region saw a 25 per cent jump, while the greater Moncton and Saint John areas saw 21 and five per cent increases.
Why are so many people buying houses?
Watts said the year started off as “another banner year” in January and February, with a slight increase in the number of house sales from 2019.
Then the pandemic hit in late March and the number of sales dropped. Once restrictions were lifted in May, sales slowly started to bounce back.
Then in June, the housing market “blew up.”
“It just rebounded like no other,” she said. “It’s a catch up.”
At the same time, sellers have also received overbids from as little as $100 to as high as $60,000 over the asking price.
The average price of homes sold in New Brunswick was a record $199,327 in June, rising 14 per cent from last year.
A seller’s market
Kelly Murdock, of Gardiner Valley Realty in Oromocto, has been a realtor for 15 years. She has never seen a year quite like this.
“This is the first time in my career we’ve had such a predominant seller’s market,” she said.
Because of this, Murdock said people who weren’t typically looking at selling might have listed their house anyway, adding a bit more variety to the market.
“People that have maybe looked at things and didn’t see things they wanted, started to see things that wouldn’t traditionally be on the market,” she said. “Something unique, something different.”
And with low cost in interest rates and in housing compared to other Canadian cities, people are buying houses in New Brunswick from all across the country.
She recently had five virtual buys from people who hadn’t seen the house in person. Many times, offers will be put in the same day or a day after a house is listed.
“When something goes on, the first thing is, ‘let’s go now.’ And secondly, ‘is it available?'” she said.
Not enough houses to sell
But there still aren’t enough houses to compensate for the number of people looking to buy them.
In a news release, the Canadian Real Estate Association said there were about 1,534 new residential listings added in New Brunswick in June 2020. This number has dropped by 3.6 per cent on a year-over-year basis.
“When you get a listing that’s in a hot area and the price is right, it’s going to go fast,” Watts said.
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