Do you live in Canada and own an apartment, house or rental building in France? The income does not disappear from your Canadian return because the property is abroad. A Canadian tax resident generally reports worldwide income, while France retains the right to tax income from real property located in France.
The file therefore has to be prepared under two tax systems that do not necessarily calculate income, expenses, depreciation or the gain on sale in the same way. Simply converting the French taxable result into Canadian dollars is rarely enough.
Report the rental income in both countries
The French return establishes the obligations connected with the property in France. In Canada, the owner must calculate rent and deductible expenses under Canadian rules and convert the amounts into Canadian dollars using an appropriate exchange rate. The Canadian net rental income may therefore differ from the French tax result.
Keep leases, bank statements, invoices, property taxes, management fees, interest, insurance and renovation records. The distinction between a current expense and a capital expenditure must be made again under Canadian rules; the French classification does not automatically determine the Canadian treatment.
- Gross rent received or receivable during the year.
- Current expenses incurred to earn rental income.
- Renovations and improvements that may have to be capitalized.
- Exchange rates and the conversion method used.
Use foreign tax credits to reduce double taxation
Tax in both countries does not necessarily mean the same income is taxed twice in full. The Canada–France tax treaty and the foreign tax credit mechanisms may allow some French tax to be recognized on the Canadian and Quebec returns.
A credit is not automatically available for every amount paid in France. Eligibility depends on the nature of the tax, the year to which it relates, the foreign income recognized in Canada and the applicable limits. French assessments and payments should therefore be reconciled with the Canadian calculation rather than entered as one undifferentiated amount.
Review Form T1135 and the property’s tax cost
A French rental property may be specified foreign property for Form T1135 purposes. The filing requirement is based in part on the total cost amount of specified foreign property, not its current market value. A property used mainly for personal purposes may be treated differently from a property held to earn income.
The Canadian-dollar tax cost should be tracked from the acquisition date. The purchase price, notarial fees, capital improvements, changes in use and capital cost allowance claimed in Canada can all affect the future calculation. Rebuilding the file only when the property is sold is often difficult.
Prepare for the sale from the first years of ownership
When the property is sold, France may tax the real-estate gain. Canada may also calculate a gain in Canadian dollars by translating the proceeds and the tax cost at the relevant exchange rates. Currency movements can therefore produce a Canadian result that differs from the gain stated in euros.
Depreciation, renovations, selling costs and any personal use should be documented. The filing year and the foreign tax credit also have to be coordinated between the two countries. Annual recordkeeping makes the eventual disposition much easier to report.
Coordinate the Canadian and French filings
A sound cross-border file begins with a clear timeline and records in both currencies. See our pages on foreign assets and income reporting and international tax treaties.
Impôts Ici can prepare the Canadian and Quebec components, calculate available credits and coordinate information received from France. To have your rental property reviewed, contact our team.
