jenintheden

I moved to Canada last January and am completing my first tax return. I’m somewhat confused about how to deal with my UK house that I rent out. I (obviously) don’t want to pay any tax on it here if I can avoid it.

Some info:
The house is worth more than $100k
The house was probably worth less when I moved here (2012) than when I bought it (2007) (thanks for that Credit Crunch!). But I haven’t had it valued.
We might move back to the UK at some point. We might not. No plans as such.
I declare the income to HMRC but any tax I have to pay will be minimal

Some questions:
1. What expenses can you claim to reduce the rental profit. Particularly, can you claim the capital cost allowances as you can for Canadian property rentals?

2. If so, my rental profit is less than 4% of the cost of the building, therefore I assume I can offset it all and declare no profit at all. Correct?

3. Where do you enter the foreign rental information in the tax return? There is just one line in the foreign investment income form. If I’m not declaring any rental profit and enter 0 in the rental income line, wouldn’t that look like I’m trying to hide it?

4. Capital Gains – if we leave (after 5 years – know there’s a 60 month exemption) how do they do the fair market valuations? Would there be any way they could know that it was worth less in 2012 than the purchase price (therefore more theoretical capital gains)?

5. If the UK market does ever pick up and I end up theoretically having gained during my time in Canada, are there any sneaky ways of getting out of it? Maybe leaving near the start of the tax year so my marginal tax rate is very low or something.

6. Is there any reason not to declare the property this year (this is my first year)?

Basically I want to know that if I declare my property, that I’m not going to get massively stung by the CRA for something that I don’t see as making me any money (ie my rent in Vancouver massively outweighs what I get from my house in Sheffield and the value of my house has gone down since I bought it!).

Thanks for any advice. I really appreciate it.

JonboyE

Yes, on the value of the building and not the land, but ...

Yes

Complete and file a T776 schedule.

It is up to you to declare honetsly, and back this up with proof if asked. No proof and the CRA are at liberty to assess you for any amount they like.

Yes, you want to minimise your other income in the year you leave as far as possible.

If you arrived in january 2012 you do not have to file a T1135 verification of foreign income. You still have to complete the T776 for the year.

You won't get stung. The CRA don't care about changes in your house's value before January 2012. Only the gain or loss whilst you are a tax resident in Canada is taxable here.

The but ...

It might seem attractive to claim CCAs now to reduce your taxes. However, remember that the CCA is recaptured as income if you dispose of the property, or are deemed to have disposed of it, at a value higher than its undepreciated capital cost. You could end up with saving tax at 20% by claiming CCA in years where you income is lower and pay tax at 40% on its recapture when you sell in a year when your incom is higher.

I am not saying don'tclaim CCA, but think about it carefully.

getoutofbritainquick

Johnboy - you should be an accountant!

Eager2bBC

Say what!!!??? Where can I find out more about this? I couldn't find anything on the CRA website?

Is it less than 4 percent of building value or building value plus land value?

I need a good accountant!

JonboyE

See chapter 4. http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html

Building value.

Eager2bBC

Wait, I see what you're saying- claim cca on building to offset your tax.

Cra will then add this onto the capital gain when you sell so it makes sense if you plan to sell when your tax rate is lower than it is now?

I still need a good accountant/financial planner...!

Eager2bBC

Thanks! Think I understand now - at first I thought they just didn't charge you if your rental income was less than 4percent of building value, but you have to choose to claim the cca on the building (if I'm understanding correctly?).

Thanks again JonboyE, always a great source of info!

JonboyE

Say you have a property worth $200,000. $100,000 land and $100,000 building. In Canada, you normally use the property tax assessment to find the ratio of land to buildings.

Year 1 you claim $2,000 CCA (100,000 x 4% / 2), year 2 $3,920 ((100,000-2,000) X 4%) and year 3 $3,763 ((100,000-2,000-3,920) x 4%). At the start of year 4 the land still has a tax cost of $100,000 and the building has an undepreciated capital cost of $90,317 (100,000 - 2,000 - 3,920 - 3,763). Say that in year 4 you sell the property for $250,000.

Tax consequences

Assuming the 50:50 ratio for land anb buildings still applies you have a $25,000 capital gain on the land. You also have a capital gain of $25,000 on the building. However, you also have a recapture of the CCA you have claimed of $9,683.

You have to add to your taxable income for the year:

Half the capital gain on the land $12,500
Half the capital gain on the building $12,500
All the recapture $ 9,683

Total $34,683

JB0591

I take it (for expats) the value of the property is that on the date they landed not the original purchase price?

Also if say it was worth $200,000 when you landed but it sells for less due to market conditions, does that reduce the recapture or is recapture always the value of CCA claimed?

JonboyE

Yes, and converted to Canadian Dollars using the exchange rate on that date. This is the tax cost in Canada and is the basis of all tax calculations.

If the original tax cost was $100,000, the undepreciated capital cost is $85,000 and the selling price is $90,000 then you have a recapture of $5,000.

JB0591

JonBoyE, sorry to be dumb but does it mean this

House price on landing $180,000 (ignoring land portion)
2 years of max CCA claimed = $7,200 + $6,912 = $14,112

if house sells for $165,888 or more then you have to recapture the difference ..
if house sells for less the $165,888 then no recapture e.g. CCA claimed is written off.
if house sells for more than $180,000 then full recapture + tax on profit (50% of profit above $180,000)

JonboyE

Yes, that is right. (Except that you can only claim half the CCA in the first year.)

JB0591

Thank you. Obviously the first/second scenario i listed is something we are facing and have not claimed any CCA in the couple of years we have been renting it out. So assuming we can resubmit updated returns it could be in our benefit.

daiske

Hi,

Do you have to declare a property in other country even if it is not rented and you are not getting any profit from it?

Thanks

I answer to myself:
http://www.cra-arc.gc.ca/E/pbg/tf/t1135/t1135-07e.txt Thanks for the link

Answer
If the property is personal use property (i.e., property owned by you that is
used by you or someone related to you primarily for personal use and
enjoyment) you do not have to report the property on Form T1135. As a result,
in situation (a), you would not need to report the condominium since it is
held primarily for personal use and enjoyment.

Aviator

You may want to get professional advice, if you are wrong, the penalties can be high.
http://www.advisor.ca/news/industry-...-be-costly-494