Foreign Tax Obligations

If you are a Canadian tax resident who owns investment properties in Mexico, you have tax obligations in both countries, but Canada will tax your worldwide income, and you may get a credit for taxes paid to Mexico under the Canada–Mexico Tax Treaty.

• You must report all income, including:
   
  • Rental income from Mexican properties
     
  • Capital gains if you sell a property
     
• Report this income in Canadian dollars.
   

• If you pay income tax in Mexico on rental income or capital gains, you can usually claim a foreign tax credit on your Canadian return to avoid double taxation.
   
• This credit reduces your Canadian tax by the amount paid to Mexico.
   

• If your foreign investment properties (or total specified foreign property) cost over CAD 100,000, you must file Form T1135 – Foreign Income Verification Statement each year.
   
  • Report property type, country, income earned, and maximum cost.
     
  • This is a reporting obligation—it does not affect taxes, but penalties are severe for non-compliance.
     

• When you sell Mexican property:
   
  • Report the capital gain on your Canadian tax return.
     
  • Adjust for foreign exchange rates.
     
  • Deduct costs like legal fees, improvements, and selling expenses.
     

• Rental income is taxable in Mexico, even for non-residents.
   
• You may need:
   
  • Remit 25% of gross rental revenue to the Mexican government if you are electing a flat withholding rate.  No RFC required.

• A Mexican tax ID (RFC) if you're electing to pay on net income.
   

• Mexico taxes capital gains on real estate sales.
   
  • Tax can be as high as 35% of the gain.
     
  • Notaries public often calculate and remit tax at closing.
     
• Some exemptions or deductions may apply if major improvements/additions were made to the property.
   

• Prevents double taxation.
   
• Gives Canada the right to tax your worldwide income (since you're a resident), but lets Mexico tax income from property located there.
   
• You can use foreign tax credits in Canada to offset Mexican taxes.

When you leave Canada and sever tax ties:

• You are deemed to have disposed of most of your property at fair market value (FMV) and reacquired it immediately, which may trigger capital gains tax.
   
• Excluded from this deemed disposition are:
   
  • Canadian real estate
     
  • RRSPs, RRIFs, TFSAs (though TFSA growth is no longer tax-sheltered abroad)
     
  • Pension plans
     
  • Certain business assets
     

You must:

• File a final tax return as a resident for the year you leave.
   
• Report worldwide income earned up to your departure date.
   
• Fill out Form T1243 (Deemed Disposition) and T1161 (List of properties over $25,000).
   

Once you become a non-resident of Canada:

• You're only taxed in Canada on Canadian-source income, such as:
   
  • Rental income from Canadian property (subject to non-resident withholding tax)
     
  • Canadian pensions (CPP, OAS, RRSP/RRIF withdrawals)
     
  • Certain capital gains on Canadian real estate
     

• Generally 25% withholding on Canadian-source income.

• Can be reduced under the Canada–Mexico Tax Treaty to the following: 
  • 15% on CPP, OAS, RRIF, LIF, RPP, and dividend payments.
  • Most Canadian interest earned by a Mexican resident is not subject to withholding tax in Canada.
  • Lump sum withdrawals from an RRSP or RRIF are subject to 25% withholding.
  • Generally there are no withholding taxes on Canadian capital gains.

You are generally considered a Mexican tax resident if:

• Mexico is your center of vital interests, meaning:
   
  • Your main home is in Mexico, or
     
  • More than 50% of your income is from Mexican sources, or
     
  • Your spouse/dependent children reside in Mexico
     

Note: Mexico does not have a formal departure tax.

As a Mexican tax resident:

• You must report and pay tax on your worldwide income, including:
   
  • Investment income
     
  • Employment or business income
     
  • Pensions and foreign income
     

You must:

• Report foreign bank accounts, investments, and trusts on the annual Mexican tax return.
   
• Failure to do so may result in penalties.
   

• Mexico allows for foreign tax credits, which may help avoid double taxation on income also taxed in Canada.
   
• The Canada–Mexico Tax Treaty coordinates this and prevents double taxation.