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I have a query about fair market value. When I moved to Canada in 2011, I recorded a fair market value for my property in London, England. This valuation was done by a realtor and was used to claim CCA allowances on my income tax while I was renting it out.
Now that I am planning to sell the property and generate a capital gain versus the fair value of property as of 2011, can I get a more precise professional valuation of the property as of 2011, as this may give a more advantageous (higher) value to reduce capital gains tax?
—Carl
When you sell a rental property, Carl, you need to calculate the net proceeds and the adjusted cost base (ACB) to determine the difference—the capital gain—and the potential tax payable.
The proceeds are easy enough to determine based on the selling price and any selling costs, but the ACB can take a bit more work. You start with the acquisition cost, including closing costs, and add any renovations over the years. However, for someone who immigrates to Canada, the calculation is a bit different.
Capital gains when moving to Canada
When you move to Canada, your deferred capital gains on assets like real estate and stocks are ignored for Canadian tax purposes. It’s only the growth that occurs thereafter that the Canada Revenue Agency (CRA) can tax.
An immigrant to Canada is deemed to sell and immediately reacquire their capital assets on their date of entry to Canada. (Most tax-deferred pensions are excluded.) The value gets converted to Canadian dollars, based on the foreign exchange rate at the time. To do the conversion, the CRA suggests using the Bank of Canada exchange rate, but it also accepts a few other verifiable sources.
For a rental property, the value upon moving to Canada becomes your cost base for capital gains tax purposes here.
Also read
Earning, saving and spending in Canada: A guide for new immigrants
Fair market value of a property for tax purposes
A taxpayer is not required to use a professional valuation, Carl. You can use your own estimate or a valuation from a realtor. However, the CRA can challenge your valuation, and the onus would be on you to prove that yours is accurate.
When you file your tax return, you must “certify that the information given on this return and in any attached documents is correct, complete and fully discloses all of my income.” As a result, it may be advisable to use a professional appraiser to determine a fair market value in a case like this.
Historical valuation
If you didn’t obtain a valuation in the past, you can certainly do one after the fact.
A realtor or a professional appraiser should be able to look back at historic and comparable sales data around the time for which you need the property valuation.
However, I think in your case, Carl, there’s a nuance that may complicate your attempt to get a higher valuation of the property in 2011.
Reporting the cost of foreign real estate
When you own real estate in another country, you aren’t necessarily obligated to report it to the CRA each year. These are the primary instances when you do need to report it:
- You earned rental income from the property. You must report this on Form T776 Statement of Real Estate Rentals each year, because Canadian residents are taxable on their worldwide income.
- You sold the property. You must report this on Schedule 3 Capital Gains or Losses. You may also need to report it on a tax return in the foreign country. To avoid double taxation, tax paid in another country is generally eligible for a Canadian foreign tax credit.
- The cost base of all of your specified foreign property is more than $100,000. If your foreign investments, including a rental property, have a cost of more than CAD$100,000, you need to file annually Form T1135 Foreign Income Verification Statement.
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Capital cost allowance on foreign property
You mentioned that you have been claiming capital cost allowance (CCA) on your foreign rental property, Carl. This would require some disclosure of the cost of the property. This may not prevent you from changing the cost base for capital gains tax purposes, because if the cost base was higher, you could have claimed higher CCA deductions all along.
However, you may be hard-pressed to retroactively increase the cost base in the year of sale, after many years of reporting a lower cost on Form T1135. Doing so may require amending your past T1135s.
Should you revise a property’s fair market value?
In summary, Carl, a taxpayer can determine a property’s fair market value after the fact, with or without a professional appraiser. However, the most important thing is to report the accurate cost of the property, whether it’s favourable to you or not. A higher valuation that is in your favour when it comes time to pay the piper may be suspect.
Read more about capital gains on real estate:
- Cutting down capital gains tax on real estate sales
- When does the “plus 1” rule apply to a principal residence?
- How capital gains tax on property is divided in a divorce
- The tax implications for Canadians selling foreign real estate
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