As a Canadian resident or citizen, you may be considering investing in foreign assets, whether it be for diversification, increased returns, or protection against currency fluctuations. However, before making any investment decisions, it is important to understand the tax implications of holding foreign assets and to ensure that you are meeting your obligations in Canada and abroad.
In this article, we will take a closer look at Canadian foreign assets and the various tax considerations that come with holding them.
What are Canadian foreign assets?
A Canadian foreign asset refers to any financial or physical asset that is located outside of Canada. These assets can range from real estate, stocks, bonds, and bank accounts to personal property such as jewelry or works of art. Canadian residents and citizens can hold foreign assets for a variety of reasons, including diversification, increased returns, and protection against currency fluctuations.
Benefits of holding Canadian foreign assets
One of the main benefits of holding foreign assets for Canadians is diversification. By spreading investments across different countries and currencies, Canadians can reduce the impact of market fluctuations and currency risks in Canada. Diversification also helps to reduce overall portfolio risk and increase the chances of realizing returns over the long-term.
- Increased returns
Foreign assets can also provide increased returns compared to domestic assets. For example, investing in emerging market stocks can provide higher returns compared to investing in Canadian stocks. This is due to the potential for higher growth in these economies and the increased risk associated with investing in these markets.
- Protection against currency fluctuations
Foreign assets can also provide protection against currency fluctuations. For example, if the value of the Canadian dollar decreases compared to the foreign currency, the foreign assets will increase in value. This can help to offset any losses incurred because of the currency fluctuation and can provide a hedge against currency risks.
- Tax considerations
It is important to consider the tax implications of holding foreign assets, as different countries have different tax laws and regulations. In Canada, foreign assets are subject to Canadian tax laws and regulations, including reporting requirements and tax liabilities. Canadian residents must report their worldwide income to the Canada Revenue Agency (CRA) and may be subject to Canadian tax on foreign income, capital gains, and other investment income.
In addition, Canadian residents may also be subject to foreign taxes on their foreign assets and may be able to claim a foreign tax credit in Canada to avoid double taxation. It is important to seek professional advice to determine the tax implications of holding foreign assets, as well as to ensure that you are meeting your tax obligations in Canada and abroad.
Foreign Asset Reporting Requirements
In Canada, residents and citizens are required to report their foreign assets to the CRA if they meet certain thresholds. These thresholds include:
- A total of CAD 100,000 or more in foreign assets at any time during the year, regardless of whether the assets are held in Canadian or foreign currency.
- An interest in a foreign property that has a cost amount of CAD 100,000 or more at any time during the year.
Canadian residents and citizens who meet these thresholds are required to complete Form T1135, Foreign Income Verification Statement, and include it with their Canadian tax return. This form requires the disclosure of information about foreign assets, including their value, location, and type.
Taxation of Canadian Foreign Assets
In Canada, foreign income and capital gains from foreign assets are subject to Canadian tax. The tax rate for foreign income will depend on the type of income, such as dividends, interest, or capital gains.
Canadian residents may also be subject to foreign taxes on their foreign assets and may be able to claim a foreign tax credit in Canada to avoid double taxation. The foreign tax credit allows Canadian residents to claim a credit in Canada for foreign taxes paid on foreign income or capital gains. The credit is calculated based on the lower of the foreign tax paid or the Canadian tax that would have been payable on the same income or capital gains. This helps to ensure that foreign income and capital gains are not taxed twice.
It is important to keep accurate records of all foreign taxes paid, as this information will be required to calculate the foreign tax credit in Canada. In addition, residents may need to file tax returns in the foreign country where their assets are located and may need to obtain a tax identification number or register for taxes in that country.
Managing Canadian Foreign Assets
When managing Canadian foreign assets, it is important to consider both the tax implications and the risks associated with investing in foreign markets. This may include currency risks, political risks, and economic risks.
To help manage these risks, it is recommended that residents seek professional advice from a tax specialist or financial advisor. This will help to ensure that the foreign assets are structured in a tax-efficient manner and that all tax obligations are met.
In conclusion, holding Canadian foreign assets can provide diversification, increased returns, and protection against currency fluctuations. However, it is important to consider the tax implications and to ensure that residents are meeting their obligations in Canada and abroad. Seeking professional advice is recommended to help manage the risks associated with investing in foreign markets and to ensure that foreign assets are structured in a tax-efficient manner.