A family member or friend leaves you a property overseas. You need to know if the inheritance should be reported to the Canada Revenue Agency and how to go about it. Although most gifts and inheritances don’t have to be reported to CRA as Canada does not have an inheritance tax, some inherited property does have to be declared, depending on value and type as well as if the property earns income.
Declaration Values
International tax specialist Gary Gauvin, EA, says that “an inheritance of money, property or investments is not taxable income for Canadian residents, whether received from another Canadian resident or a foreign resident.” An inheritance that consists of cash only doesn’t have to be reported to the Canadian tax authorities when inherited directly from the decedent. However, if you take possession of “specified foreign property,” you may need to file Form T1135, Foreign Income Verification Statement. This form is used to declare ownership to the tax authorities if the property value exceeds what the CRA calls the $100,000 reporting threshold.
Property Types
What the Canadian Income Tax Act defines as “specified foreign property” includes both tangible and intangible assets. For example; intangible property such as patents and copyrights should be reported if the value is above the $100,000 limit. Tangible property such as stock in corporations, whether in Canadian companies or not if held outside the country, qualify as specified foreign property, as do government and corporate bonds held by foreign entities. A financial interest in a foreign trust, partnership, or insurance policy is three additional examples of property that should be declared if the value exceeds the threshold. Real estate, in some cases, is classified as specified foreign property, as are properties that can be converted into a specified foreign property.
Exceptions to Reporting
There are exceptions to what properties you must declare. If you inherited property used solely for business purposes, it does not have to be reported. In addition, property that you use for your personal benefit, including real estate, does not need to be declared.
For example;
suppose Aunt Kay leaves you the European villa where you and your spouse have vacationed in the past. You both enjoy the place, intend to retain ownership, and spend future vacations there. The CRA considers this “personal-use property” and you don’t have to declare ownership.
If you rent the property and earn rental income, however, this does have to be reported. As Gauvin clarifies, “If the asset inherited is left abroad and is earning income, you are required to report the income earned in the same fashion as Canadian source income, after converting it to Canadian dollars.”
Reporting Income
Gauvin notes that when you file your federal taxes, “Interest and dividends would get reported on the federal worksheet, capital gains on Schedule 3 and rental property income on Form T776. Your cost, the adjusted cost base, for all Canadian purposes will be the value on the date of death of the decedent, not the date you actually receive any funds in Canada.”
Accounting for Cumulative Value
Suppose you inherit property valued at $50,000 but already own foreign property valued at $60,000. Since the total value of foreign property owned, $110,000, would put you over the threshold for the tax year, you must declare it. According to the CRA, if anytime during the tax year you go above the threshold, declare ownership of the property by filing Form T1135.
Remember Foreign Taxes
Being prepared to report any and all types of income and property, both earned and inherited, makes good financial sense. As Subhash Sharma, CMA, a tax professional working in Toronto, wrote on the website for the publication Canadian Immigrant, “Income properties are also subject to tax on capital gains on the disposition or deemed disposition upon death of the taxpayer. The rationale is that you are receiving 100 percent of the benefits of living in Canada, so you should pay tax on 100 percent of your income.” But don’t forget taxes you may have paid on the foreign property to a foreign government. Gauvin reminds us that, “as with all foreign source income, you can claim a foreign tax credit if you are subject to tax in the foreign country on the income.”
Which TurboTax Is Best for You?
When a loved one has passed, all the paperwork and legal jargon can seem a little confusing or daunting to deal with. But with the right information ahead of time, you can still navigate the tax waters to file your return with TurboTax Online.
However, if you feel a bit overwhelmed, consider TurboTax Live Assist & Review and get unlimited help and advice from a real person as you do your taxes. Plus, there’s a final review before you file. Or, you can choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
*TurboTax Live™ Full Service is not available in Quebec.
References & Resources
- Canada Revenue Agency: Amounts that are not Taxed
- Canada Revenue Agency: Foreign Income Verification Statement
- Canada Revenue Agency: Income Tax Folio: S5-F2-C1: Foreign Tax Credit
- Canada Revenue Agency: Questions and Answers about Form T1135
- Gary Gauvin, EA; Gary P Gauvin LLC; Rockwall, Texas
Photo Credits
- Kim Carson/Photodisc/Getty Images