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Tax on Rental Income from the UK?

Tax on Rental Income from the UK?

Old Sep 8th 2010, 10:33 am
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Default Tax on Rental Income from the UK?

Guys, i know this has been asked and probably answered before, i just dont understand tax as well as i probably should!

We're moving to Vancouver just after Christmas and between now and then my partner and i are hoping to buy a small house in the UK for my mother to live in as a tennant. Now we're only going to be charging her rent she can afford which if we're lucky might pay 100% of our monthly mortgage payments but most likely will be around 80% meaning i'll be paying the remaining 20% or so from Canada when i get there... So i doubt i'll have any profit to speak of, does that mean i dont need to declare it in the UK or Canada?

Sorry guys, this stuff just baffles the hell out of me, i've been googling for a week and know less now then when i started

Any advice would be gratefully received!

Rich
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Old Sep 8th 2010, 11:09 am
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Default Re: Tax on Rental Income from the UK?

Hi there,

We are also renting out our property in the uk, but have to subsidize the mortgage as the rent doesn't cover the full amount because of this we are not paying any additional tax in the UK (we move to Canada at the end of the year), but I'm not sure how it works in Canada exactly. JonboyE did pm me about this awhile ago, but to be honest i haven't looked into it properly. Hopefully he will be along to give you some information.
I do have an accountant over here over, so that helps.

I hope this helps in any way.

Good Luck.

Mrs Arabian
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Old Sep 8th 2010, 12:30 pm
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Default Re: Tax on Rental Income from the UK?

Profit is determined by your interest portion of your mortgage not your total, so it could still be you may break even.

You can claim a loss against tax, but I am not sure that would cut it when its rented for 12 months a year.
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Old Sep 8th 2010, 2:25 pm
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Default Re: Tax on Rental Income from the UK?

You have to account for your world income if deemed a tax resident of Canada. Add up the income, deduct any legitimate outgoings, the difference is your reportable gain or loss. It is unwise to ignore it and assume you are making nothing. At the very least, if CRA do an audit and find it they will in all likelihood require proof of a loss, not just take the tax payers word for it. Remember if the tax man says you owe money, it is up to you to prove you don't not them to prove you do.

Keep accurate records and receipts, track it on a spreadsheet. If you make a loss this could be deducted against Canadian income tax.

You would also be wise to get a valuation of any property as close to the day you take up residency in Canada as possible and the prevailing exchange rate from the BOC. Any change in value, either real or currency are reportable. Foreign assets valued at over $100,000 are also reportable (for information only). There are stiff penalties if you forget to do this and get found out.

It is advisable to use an accountant, especially as a new arrival. This not only helps you avoid pitfalls, it helps you t maximise any tax saving opportunities. They should save you more than they cost.
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Old Sep 8th 2010, 3:50 pm
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Default Re: Tax on Rental Income from the UK?

Yes, you have to report the rental income or loss, and the value of the property if all your foreign property (house, cash on deposit, shares etc) total more than $100,000 at any time in the year - excluding the year you become tax resident in Canada.

The good news is that you can deduct a rental loss against other income and this can reduce your taxes in Canada. (Note what gryphea said about the mortgage interest being deductible, not the mortgage payment.)

The bad news is that you are not dealing at arms length with the tenant therefore you have to account for a fair market value rent if this is more than the actual rent you charge your mother. The calculation may start like this:

Actual rent received - £6,000
Mortgage payments - 7,000
Insurance - 500
Repairs - 300

Cash loss - (1,800)

But end up like this:

Fair market value rent - £7,500
Interest on mortgage - 6,000
Insurance - 500
Repairs - 300

Taxable profit - 700

As already suggested, get an independent valuation of the property shortly before you move to Canada. Within the range of values the appraiser feels comfortable with you want the highest possible. At the same time ask the appraiser to estimate the fair market value of the rent. Within the range of values the appraiser feels comfortable with you want the lowest possible. If this is still higher than the rent you are charging your mother you either need to justify the difference, or assume you received the higher rent on your Canadian tax return.
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Old Sep 9th 2010, 4:31 pm
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Default Re: Tax on Rental Income from the UK?

Ok, i think i get this now...

So basically i'm going to have to either get fair market value out of my tenant (mother) or at least declare that as my income to be doing this all above board?

Then i can deduct mortgage interest (pretty high proportion as i'm a first time buyer) and also allowable expenses like repairs and building/contents insurance. So unless my deductable expenses can equal my capital portion of the mortgage i'm going to end up in "profit" and i'll have to pay tax on that amount...

So as my Fiance and i are buying the house together do we declare 50% of all the above separately to the CRA?

Also, in the UK we obviously dont want to be paying tax on this income at the same time so i guess we have to tell the UK HMRC to leave us alone as we're not living in the UK any more?

I'm sure all this will be ok a year down the line but it's the 6 month cross over where i'm not out of England long enough so will have to pay here and it sounds like i'll have to declare it to the CRA almost as soon as i land???

Right... my brain has melted now, i'll take your advice and get an accountant when we get to Canada, seems like i might need one here before we go as well

Thanks for all your help
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Old Sep 9th 2010, 6:25 pm
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Default Re: Tax on Rental Income from the UK?

WE sign a non resident landlord form and as our profit is below the personal tax allowance in the UK we never pay UK tax on it. We go through an agency and they facilitate this and do offical reporting to IR

WE jointly own the house and so split the profit between us.

The profit can be converted into CAD dollars, either as it happens or using their yearly average rate. I do both and use the one most favourable (allowed). First year due to way expediture panned out monthly rates were more favourable. Last year I used the yearly average.
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Old Sep 9th 2010, 7:53 pm
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Default Re: Tax on Rental Income from the UK?

Originally Posted by The Aviator View Post
You have to account for your world income if deemed a tax resident of Canada. Add up the income, deduct any legitimate outgoings, the difference is your reportable gain or loss. It is unwise to ignore it and assume you are making nothing. At the very least, if CRA do an audit and find it they will in all likelihood require proof of a loss, not just take the tax payers word for it. Remember if the tax man says you owe money, it is up to you to prove you don't not them to prove you do.

Keep accurate records and receipts, track it on a spreadsheet. If you make a loss this could be deducted against Canadian income tax.

You would also be wise to get a valuation of any property as close to the day you take up residency in Canada as possible and the prevailing exchange rate from the BOC. Any change in value, either real or currency are reportable. Foreign assets valued at over $100,000 are also reportable (for information only). There are stiff penalties if you forget to do this and get found out.

It is advisable to use an accountant, especially as a new arrival. This not only helps you avoid pitfalls, it helps you t maximise any tax saving opportunities. They should save you more than they cost.
We have been told that when we exchange the GBP into C$ eventually, if there is any gain, we will have to pay tax on it. If this is the case, any Capital Gain Allowance available?

Say, if we decide to return to the UK, can we transfer the GBP back and no tax implication. Please help. Taxation is more complicated in here than in the UK.
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Old Sep 9th 2010, 8:43 pm
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Default Re: Tax on Rental Income from the UK?

Originally Posted by Rich_London View Post
Ok, i think i get this now...

So basically i'm going to have to either get fair market value out of my tenant (mother) or at least declare that as my income to be doing this all above board?

Then i can deduct mortgage interest (pretty high proportion as i'm a first time buyer) and also allowable expenses like repairs and building/contents insurance. So unless my deductable expenses can equal my capital portion of the mortgage i'm going to end up in "profit" and i'll have to pay tax on that amount...

So as my Fiance and i are buying the house together do we declare 50% of all the above separately to the CRA?

Also, in the UK we obviously dont want to be paying tax on this income at the same time so i guess we have to tell the UK HMRC to leave us alone as we're not living in the UK any more?
I'm sure all this will be ok a year down the line but it's the 6 month cross over where i'm not out of England long enough so will have to pay here and it sounds like i'll have to declare it to the CRA almost as soon as i land???

Right... my brain has melted now, i'll take your advice and get an accountant when we get to Canada, seems like i might need one here before we go as well

Thanks for all your help
NO - you will have to pay tax in the UK, but your circumstances sound like you will be beneath the personal tax free allowance.

I.e. your "profit" (after mort interest, insurance, gas-safe, energy effy, 10% wear & tear allowance, etc) will be less than the circa GBP7K annual personal allowance.

As well as the P85 form that all leavers need to complete, you will also need to complete an NRL1 form to ensure your letting agent (or tenant) does not have to withhold 20% of the rent and send it directly to the tax man (foreign landlords form).

Each year you will have to submit a self-assessment tax return detailing the incomings and outgoings of your rental business and have the tax man tell you that your calculation is zero.
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Old Sep 9th 2010, 10:45 pm
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Default Re: Tax on Rental Income from the UK?

Originally Posted by Newton08 View Post
We have been told that when we exchange the GBP into C$ eventually, if there is any gain, we will have to pay tax on it. If this is the case, any Capital Gain Allowance available?
Yes. 50% of the gain.

Say, if we decide to return to the UK, can we transfer the GBP back and no tax implication. Please help. Taxation is more complicated in here than in the UK.
No Canadian tax implications for converting $ to £ if you are going non-resident from Canada. However, you may have to pay tax on some capital gains you made while in Canada - usually shares held outside an RRSP or pension plan.
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Old Sep 10th 2010, 4:15 am
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Default Re: Tax on Rental Income from the UK?

Originally Posted by JonboyE View Post
Yes, you have to report the rental income or loss, and the value of the property if all your foreign property (house, cash on deposit, shares etc) total more than $100,000 at any time in the year - excluding the year you become tax resident in Canada.

The good news is that you can deduct a rental loss against other income and this can reduce your taxes in Canada. (Note what gryphea said about the mortgage interest being deductible, not the mortgage payment.)

The bad news is that you are not dealing at arms length with the tenant therefore you have to account for a fair market value rent if this is more than the actual rent you charge your mother. The calculation may start like this:

Actual rent received - £6,000
Mortgage payments - 7,000
Insurance - 500
Repairs - 300

Cash loss - (1,800)

But end up like this:

Fair market value rent - £7,500
Interest on mortgage - 6,000
Insurance - 500
Repairs - 300

Taxable profit - 700

As already suggested, get an independent valuation of the property shortly before you move to Canada. Within the range of values the appraiser feels comfortable with you want the highest possible. At the same time ask the appraiser to estimate the fair market value of the rent. Within the range of values the appraiser feels comfortable with you want the lowest possible. If this is still higher than the rent you are charging your mother you either need to justify the difference, or assume you received the higher rent on your Canadian tax return.
Oops!! Say, you did everything as above, except get the independent valuation of the property before you left? Would that cause you big problems if you want to sell in UK later?

Thanks.
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Old Sep 10th 2010, 3:39 pm
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Default Re: Tax on Rental Income from the UK?

Originally Posted by snow valley View Post
Oops!! Say, you did everything as above, except get the independent valuation of the property before you left? Would that cause you big problems if you want to sell in UK later?

Thanks.
Probably not. When you sell the property you have to declare any capital gain on your tax return. Without a valuation you will just have to make a guess about the market value of the property on the day you moved to Canada. As long as the guess is reasonable it will, most likely, be accepted by the CRA as declared. There is an assumption that people are honest when completing their tax returns.

However, if your return is selected for review or audit then the burden of proof falls on you and you will have to show that the value selected is correct or, at the very least, reasonable. The CRA know that, when asked to estimate values for tax purposes, people will always estimate in their favour - not the CRAs. If the auditor decides that you are not being reasonable they can assess you for a bigger amount and let you prove they are wrong.

The longer you leave it the more difficult it will be to find evidence to support your valuation. It will be a good idea to get some documentary evidence as soon as you can. Bits of paper make auditors happy and they take a very different approach with taxpayers who try their best to meet their obligations under the Income Tax Act to those that disregard them.

IMO the chances of this being a problem are slim but the amount of brown sticky stuff you could be in is potentially large.
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Old Sep 11th 2010, 1:27 am
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Default Re: Tax on Rental Income from the UK?

Originally Posted by JonboyE View Post
Probably not. When you sell the property you have to declare any capital gain on your tax return. Without a valuation you will just have to make a guess about the market value of the property on the day you moved to Canada. As long as the guess is reasonable it will, most likely, be accepted by the CRA as declared. There is an assumption that people are honest when completing their tax returns.

However, if your return is selected for review or audit then the burden of proof falls on you and you will have to show that the value selected is correct or, at the very least, reasonable. The CRA know that, when asked to estimate values for tax purposes, people will always estimate in their favour - not the CRAs. If the auditor decides that you are not being reasonable they can assess you for a bigger amount and let you prove they are wrong.

The longer you leave it the more difficult it will be to find evidence to support your valuation. It will be a good idea to get some documentary evidence as soon as you can. Bits of paper make auditors happy and they take a very different approach with taxpayers who try their best to meet their obligations under the Income Tax Act to those that disregard them.

IMO the chances of this being a problem are slim but the amount of brown sticky stuff you could be in is potentially large.
Thank you so much for your advice. It is appreciated. The last thing I want to be in is any amount of brown sticky stuff, so I will get onto this ASAP.
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Old Sep 11th 2010, 3:26 am
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Default Re: Tax on Rental Income from the UK?

Originally Posted by JonboyE View Post
Yes. 50% of the gain.



No Canadian tax implications for converting $ to £ if you are going non-resident from Canada. However, you may have to pay tax on some capital gains you made while in Canada - usually shares held outside an RRSP or pension plan.
Thank you JonboyE for your advice. Re the transfer back to the UK, I am sorry but I should have made it clear is if we hold on to the GBP that we brought with us, and if we decided to go back, could they be just transferred back to our UK bank account, no gain or no loss?
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Old Sep 11th 2010, 3:23 pm
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Default Re: Tax on Rental Income from the UK?

Originally Posted by Rich_London View Post
Guys, i know this has been asked and probably answered before, i just dont understand tax as well as i probably should!

We're moving to Vancouver just after Christmas and between now and then my partner and i are hoping to buy a small house in the UK for my mother to live in as a tennant.
Doing business with family members is a bad idea. What's the plan if your mother doesn't pay - are you going to evict her? Why can't she rent another house?

Also - why is your partner in on this deal, especially if you're not married. And if there is going to be a mortgage involved, is the loan going to be in join names?
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