If a Canadian sells foreign real property with an accrued gain, he or she should be able to claim a foreign tax credit in Canada for the foreign taxes paid. The same is not true if the Canadian dies owning the property: the Canadian is deemed to dispose of the property for fair market value proceeds and pay tax accordingly. If the Canadian’s estate later sells the property, it will not be able to claim a foreign tax credit, and the foreign jurisdiction will almost certainly not recognize the bump in tax cost that occurred for Canadian tax purposes as a result of the taxpayer’s death.
(This problem generally does not apply to Canadians who own real property in the US because of Article XXIX-B of the Canada-US treaty.)
The authors propose a fix that draws on the rules in subsections 126(2.21) and (2.22) of the Income Tax Act that permit emigrants to claim a credit in Canada for foreign taxes paid on property deemed to have been disposed of on emigration.
Goldberg and Keung “Until Death Do They Part: Tax Issues For Canadians Owning And Dying With Foreign Real Property” Tax Topics no. 2654 (January 17, 2023)
