Kennedyboy

Hello. I own a property in the UK which I built between 2011 and 2015. I have had it rented since 2015. I only just found out I need to pay income tax here in canada on the rental income, and I also need to declare the property on form t1135. This is unfortunate but I'm ok with it as I want to adhere to the tax rules. I plan on making a voluntary disclosure for tax years 2015 and 2016 to "fess up" about my income and property. It was an honest mistake based on poor advice. I hope to be able to pay back tax plus interest and avoid penalties. My biggest concern is form t1135. I Was gifted the land on which the property was built, and I wired money back from my Canadian account to my uk account to pay for construction materials etc. The majority of the Labour was carried out by myself over 4 years work of extended trips home and by favors from families and friends. The actual cost (money spent by me) was around £90000, but the value of the house was closer to £300,000 including the land. My question is what do I put on form t1135. If I put down cost it will mean that if I ever sell the property or even move back to live in it permanently I will face a massive capital gains Bill as they will calculate market value minus cost, effectively erasing any hard work and profits in one swoop. For a new built property is it acceptable to put market value at time of completion of build? Providing the cost of build would be a huge task as it was spread over 4 years and not to mention the gifted land. I had always imagined that I could move from canada to the UK for a year and live in the house thus avoiding capital gains. Not so easy it would seem. Any help on how to minimize or avoid capital gains would be much appreciated. I already posted a similar thread to this but I think this one is easier to understand. Thanks

JonboyE

Having looked into it a bit more I think you will be OK to include the fair market value of the land on the date you inherited it as part of your cost for the T1135. This will mean fewer complications if you need to calculate a capital gain in the future.

I do not think you can include an imputed cost of the labour you did yourself.

Kennedyboy

Thanks JonboyE. I just had a very helpful discussion with a tax lawyer. He first told me I'm lucky I'm dealing with this now as the rules on t1135 are tightening as of 01 January 2018. His advice in my case is make a voluntary disclosure on income and property owned in uk for tax years 2015 and 2016 which I didn't declare. I will hopefully avoid penalties and may get some interest relief. As for form t1135, the cost of the property is what's important. I need to get a valuation done on land at time it was gifted and add that to my actual building cost on paper. That is the amount I declare on form. For capital gains, unfortunately I would get taxed on sale price minus cost declared on t1135. The tax would be on 50% of that profit at my standard income tax rate (depends on which tax bracket I'm in). This rule applies to whether I sold the house while living here or if I leave canada permanently. There is no rule in canada for living in a second home for a year to avoid capital gain unlike the UK and USA. Thanks for all your help

Aviator

If you plan on moving away from Canada, you may also want to look at Departure Tax and deemed disposition.