- Foreign income and foreign tax must be converted to Canadian dollars using the Bank of Canada rate on the day the amounts arose, or the average annual rate for multiple payments.
- The federal foreign tax credit is generally the lesser of the foreign tax actually paid and the Canadian tax payable on net income from that country.
- Foreign property that is mainly rented out for profit is not personal-use property, so its entire cost is reported when Form T1135 applies.
- Keep records of rent, expenses and foreign tax paid, since each feeds a different part of the return.
If you live in Ontario and collect rent on a property in another country, you may be taxed in both places. Canada has a way to reduce that overlap through the foreign tax credit, but you have to report the income correctly and in Canadian dollars.
This article walks through the main steps: reporting the rent, converting currency, claiming the credit, and checking whether Form T1135 also applies. Tax treaties can change the result in some cases, so an accountant or lawyer should confirm how your country's rules interact.
Start with the basic rental reporting rules
The CRA's rental guide describes the usual way rental income is reported: on Form T776, Statement of Real Estate Rentals, with gross rents on line 8299 and net income or loss on line 12600 of the T1 return. Rental income is reported on a calendar-year basis, and the accrual method is the default.
The person who owns the property reports the income or loss, and co-owners report their share in proportion to their ownership. Reasonable expenses incurred to earn the rental income can be deducted, such as interest on money borrowed to buy or improve the property, property taxes and insurance. Mortgage principal repayments are not deductible.
If the property is rented below fair market value, the CRA treats it as a cost-sharing arrangement, and a rental loss cannot be claimed. Whether these rules apply the same way to your foreign property can depend on the facts, so confirm the details.
Converting foreign currency to Canadian dollars
Foreign income and foreign tax must be converted to Canadian dollars using the Bank of Canada exchange rate in effect on the day the amounts arose. If you received multiple payments over the year, which is common with monthly rent, the CRA directs you to use the average annual rate.
- Keep a record of each rent payment in the foreign currency.
- Record the foreign tax you paid, also in the foreign currency.
- Apply the same conversion method consistently to the income and to the foreign tax.
Claiming the foreign tax credit
A Canadian resident who reports foreign-source income and paid tax to another country completes Form T2209 and enters line 12 on line 40500 of the return. For each country, the credit is generally the lesser of the foreign income tax actually paid and the Canadian tax otherwise payable on net income from that country.
In practice, this means the credit usually cannot exceed the Canadian tax on that same income. If the other country's tax is higher, the extra is not simply refunded by Canada. If it is lower, you may owe the difference in Canada.
Provincial residents outside Quebec also complete Form T2036 for the provincial credit. That includes Ontario residents.
| Step | What you do |
|---|---|
| Convert income | Use the Bank of Canada rate on the day, or the average annual rate for multiple payments |
| Convert foreign tax paid | Use the same approach in Canadian dollars |
| Federal credit | Complete Form T2209 and carry line 12 to line 40500 |
| Provincial credit | Complete Form T2036 |
Check whether Form T1135 also applies
Income reporting and foreign property reporting are separate obligations. Form T1135 is required if the total cost of your specified foreign property was more than $100,000 at any time in the year. The test uses cost, not market value.
Foreign property that is mainly rented out for profit is not personal-use property, so its entire cost is reported. If the total cost was less than $250,000 throughout the year, simplified Part A reporting is available, and at $250,000 or more detailed Part B is required.
The form is due on the same date as your return: April 30 for most individuals, June 15 for self-employed individuals. The late-filing penalty is $25 per day for up to 100 days, with a $100 minimum and $2,500 maximum, and the penalties can be much higher for knowing or grossly negligent failure. The due diligence exception does not apply.
What to do next
- Gather rent receipts, expense records and tax slips or assessments from the foreign country.
- Convert each amount to Canadian dollars using the method above.
- Complete the rental statement for the property, then the foreign tax credit forms.
- Total the cost of your foreign property and decide whether T1135 is required.
- If prior years were not reported, ask a lawyer or accountant about the Voluntary Disclosures Program, which requires a valid disclosure.
Frequently asked questions
Which exchange rate do I use for foreign rent?
Use the Bank of Canada exchange rate in effect on the day the amounts arose. For multiple payments over the year, the CRA directs use of the average annual rate.
How does the foreign tax credit avoid double tax?
For each country, the credit is generally the lesser of the foreign income tax actually paid and the Canadian tax otherwise payable on net income from that country. You claim it on Form T2209 and line 40500.
Do I also need a provincial credit form?
Provincial residents outside Quebec also complete Form T2036 for the provincial credit. Ontario residents fall in that group.
Does a rented foreign property count for T1135?
It can. Foreign property that is mainly rented out for profit is not personal-use property, so its entire cost is reported if you are over the $100,000 cost threshold.
Sources
- CRA Guide T4036, Rental Income — canada.ca
- CRA, Questions and answers about Form T1135 — canada.ca
- CRA, Foreign Income Verification Statement — canada.ca
- CRA, Table of penalties (foreign reporting) — canada.ca
- CRA, Line 40500 Federal foreign tax credit — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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