Canadian Tax on a Property in Mexico : What a San Miguel de Allende Owner Owes the CRA

A Canadian resident who owns property in San Miguel de Allende is taxed by Canada on it, because Canada taxes its residents on worldwide income. When the house is sold, the gain is computed in Canadian dollars, one-half of it is taxable for a 2026 disposition, and the Mexican income tax withheld by the notario is credited against the Canadian tax on that gain, up to that tax and not beyond. When the house is let, the net rent goes on Form T776 and the Mexican income tax on it is credited the same way. Separately, Form T1135 asks every year whether you held more than 100,000 dollars of specified foreign property: a house used primarily for personal use is excluded, and a house let for most of the year is not.

This is the Canadian half. The Mexican half, what the notario withholds on a sale and what three levels of Mexican government take from rent, is on our pages on capital gains tax when a foreigner sells in San Miguel and rental income tax on a San Miguel property. The wider decision is in the Canadian buyer’s guide. Everything here comes from the Income Tax Act, the CRA’s guidance and folios, the Bank of Canada and the 2006 Canada–Mexico tax convention. It is research, not tax advice, and the worked example below is the case for engaging a Canadian CPA who handles Mexican-source income before you sell, let or leave.

Do Canadians pay tax on property in Mexico?

Yes. Subsection 2(1) of the Income Tax Act taxes every person resident in Canada at any time in the year, and section 3 counts income from sources inside or outside Canada. The CRA’s residence folio states it in one line: an individual resident in Canada is subject to Canadian income tax on worldwide income from all sources.

Residence, not citizenship and not the location of the house, is the test. It is a question of fact, and the CRA treats three ties as almost always significant: a dwelling place, a spouse or common-law partner, and dependants. A Canadian who winters in San Miguel and keeps a home and household in Canada is ordinarily still resident, and all of this page applies. How long you can be away before provincial health coverage lapses is a provincial rule rather than a tax one, and is covered in the buyer’s guide.

Mexico has its own residence test, which we have not verified. Where both countries claim you, Article 4(2) of the convention decides in this order: permanent home available, then centre of vital interests, then habitual abode, then nationality.

Do I have to report my house in Mexico on Form T1135?

This is the most consequential filing question for a Canadian owner in San Miguel, and it turns on how the house is used.

Form T1135, the Foreign Income Verification Statement, is required where the total cost of your specified foreign property exceeded 100,000 dollars at any time in the year. Specified foreign property includes tangible property situated outside Canada and funds held outside Canada. Paragraph (p) of the definition in section 233.3 of the Act excludes personal-use property, which section 54 defines as property used primarily for the personal use or enjoyment of the taxpayer or a related person. The CRA’s own words:

“No, you do not have to report personal-use property. This includes vacation property that you use primarily as a personal residence.”

“Personal-use property is generally defined as property owned by the taxpayer that he or she or a related party uses primarily for personal or enjoyment purposes. The CRA takes the view that “primarily” means more than 50%. Whether a particular property is primarily for personal use or enjoyment is a question of fact that is determined on a case-by-case basis.”

The CRA works the rule through a foreign condominium costing 120,000 dollars and a four-unit building. Applied to a San Miguel house:

Four details decide more cases than the headline rule.

Cost, not value. The threshold runs on cost amount, which the CRA says “generally is the adjusted cost base and not the fair market value”. A house bought years ago for the equivalent of 90,000 Canadian dollars is under the threshold on its own, whatever it is worth today. One consequence follows from the Act rather than the CRA’s answers: when a personal home starts to be let, subsection 45(1) deems it sold and reacquired at fair market value, so its cost can jump to today’s value the day the letting begins, unless you make the subsection 45(2) election discussed below.

Everything abroad is added together. The CRA’s own example adds a 75,000 dollar foreign shareholding to a 35,000 dollar foreign bank account and requires the form. A San Miguel peso account that pays the gardener and the predial counts towards the 100,000 dollars even when the house does not.

Any time in the year. One day over the threshold is enough, and then everything held during the year is reported, including property sold before year-end.

The answer can change each year. A house that was personal-use for five years and is let for most of the sixth becomes specified foreign property in the sixth. San Miguel owners hold direct title with no fideicomiso, so the question concerns the house itself rather than an interest in a bank trust.

Between 100,000 and 250,000 dollars throughout the year, Part A offers a simplified method; above that, Part B applies. For 2025 the form was due with the return: 30 April 2026, or 15 June 2026 where you or your spouse carried on a business.

The last row is the one for an owner who has been letting quietly: those years stay open three years longer than usual.

How much Canadian tax is due when I sell a property in Mexico?

One-half of the capital gain is taxable. That rate was in doubt for a year, so here is how it reached 2026 intact.

The CRA’s 2025 capital gains guide still carries a sentence giving the rate “for 2024”. The rate it gives is the same one-half; we cite the Act instead.

The gain is proceeds, less adjusted cost base, less selling expenses. The CRA describes adjusted cost base as usually the cost plus expenses to acquire the property, such as commissions and legal fees, plus capital expenditures such as additions and improvements, and not maintenance or repairs. Selling expenses include commissions, legal fees, transfer taxes and advertising. Which lines of a San Miguel closing statement, the ISAI acquisition tax, the notario, the appraisal, the registry, belong in cost is for your accountant, who will need the itemised statement to decide. The same papers are what a notario needs to accept deductions on the Mexican side, so one file serves both governments.

One rule cuts against owners when the currency turns. A house used for personal enjoyment is personal-use property, and under subparagraph 40(2)(g)(iii) a loss on it is nil. A house that made money in pesos and lost it in Canadian dollars produces no Canadian loss, while Mexico still taxes the peso gain.

What exchange rate do I use to convert pesos?

The Bank of Canada rate for the day each amount arose, under subsection 261(2) of the Act. For a sale, the CRA’s guide converts the proceeds at the rate at the time of sale, the adjusted cost base at the rate when the property was acquired, and selling expenses at the rate when they were incurred.

So the Canadian gain carries every movement in the peso between purchase and sale, while Mexico computes its tax entirely in pesos, indexed for Mexican inflation. The two governments measure different things and routinely disagree by a wide margin. San Miguel adds a third currency: prices are negotiated in US dollars, the escritura states pesos, and the money leaves a Canadian account. Your Canadian cost is what you actually paid, on the day you paid it, so keep the wire confirmations as well as the deed. Where the two disagree, as they do when a price was under-declared, the problem exists on both sides of the border.

The Bank of Canada publishes daily and annual average rates for the peso.

The two measures point in opposite directions across 2025. On the daily rate the peso gained about 9.3 per cent against the Canadian dollar between the first and last trading days of the year; on annual averages it was about 3.1 per cent weaker in 2025 than in 2024. Both are correct. A purchase or sale uses the rate for its day; for income received through the year, such as rent, the CRA accepts an annual average. Mixing the two gives a wrong answer in whichever direction you erred. The US dollar leg has the same trap, set out in our currency risk analysis.

Can I claim a foreign tax credit for the Mexican tax?

Yes, up to the Canadian tax on the same income, and not a dollar further.

Article 13(1) of the convention lets Mexico tax gains on immovable property situated in Mexico, so Mexico taxes the sale first, through the notario at closing. Article 21(1)(a) commits Canada, subject to its domestic rules, to deduct the Mexican tax from Canadian tax on the same gain, and Article 21(3) deems the gain to arise in Mexico for that purpose.

The domestic rule is section 126 of the Act. The CRA states the limit plainly: for each foreign country you claim the lesser of the foreign income tax you actually paid and the tax otherwise payable in Canada on your net income from that country. The federal credit is calculated on Form T2209 and the provincial one on Form T2036; Quebec residents go to Revenu Québec. Four further rules matter.

• Only income or profits tax counts. That is the wording of subsection 126(7). Mexican income tax on the sale qualifies on its face.
• Country by country. Surplus Mexican tax cannot shelter income from anywhere else.
• Nothing carries over. The CRA’s foreign tax credit folio, at ¶1.24, says non-business foreign tax that cannot be, or is not, claimed for the year cannot be carried over and claimed in another year.
• Only the taxable half is in the formula. The Mexican tax is measured against Canadian tax on half the gain.

A non-resident of Mexico pays Mexico either 25 per cent of the gross price or 35 per cent of the computed peso gain. Canada taxes half the Canadian-dollar gain at ordinary rates. The Mexican figure is often the larger, and the difference is lost. That makes the Mexican choice between the two methods, set out on our capital gains page, the place where a Canadian seller’s money is decided. Canada does not rescue a poor Mexican choice.

A worked example, with invented numbers

Everything here is hypothetical and chosen for round arithmetic. It is not market data or a price for any San Miguel property, and the exchange rates are not forecasts. Canadian tax is taken at an assumed 45 per cent of the taxable half for illustration only; your real figure depends on your province, your other income and the proportional formulas on Forms T2209 and T2036. The Mexican gain-basis figure is an assumption, because the real one is computed by the notario under Articles 121 and 124 of the Mexican income tax law.

A Canadian resident who is not a Mexican tax resident bought for 6,000,000 pesos, including acquisition costs, when a Canadian dollar bought 15 pesos. They sell for 10,000,000 pesos with 500,000 pesos of selling costs. In column A the peso has strengthened to 12.5 per dollar; in column B it has weakened to 20.

Three things fall out of it. The same peso result produced a Canadian gain of 360,000 dollars in one column and 75,000 in the other: Canada taxed the currency as well as the house. On the default method Canada collected nothing in either column and the seller still paid 200,000 or 125,000 dollars, because the credit is built to stop at Canada’s own tax. And the method chosen in Mexico moved the total by 119,000 dollars in column A and 75,000 in column B, more than any Canadian planning in the example. A sharper fall in the peso would turn the Canadian result into a loss, nil on a personal-use house, while Mexico still taxed the 3,500,000 peso gain.

Can a house in Mexico be my principal residence?

It can. Paragraph 2.74 of the CRA’s principal residence folio, S1-F3-C2:

“A property that is located outside Canada can, depending on the facts of the case, qualify as a taxpayer’s principal residence … A taxpayer who is resident in Canada and owns such a qualifying property outside Canada during a particular tax year can designate the property as a principal residence for that year in order to use the principal residence exemption.”

The house must be ordinarily inhabited in the year by you, your spouse or partner, a former spouse or partner, or a child, and the folio accepts that even a short period of occupation is sufficient, which suits a winter house. The exception is a house owned mainly to earn income, although the folio says incidental rental income alone does not put a house in that category. The designation is made on Schedule 3 and Form T2091(IND) in the year of sale.

The constraints are the point. For 1982 and later years only one property can be designated per year for the whole family unit, which generally means you, your spouse or partner, and your unmarried children under 18. The formula in paragraph 40(2)(b) counts only years in which you were resident in Canada, and its extra year applies only if you were resident in the year of acquisition.

In the worked example, the Canadian tax left after the credit was at most 1,000 dollars. Designating the San Miguel house would have saved that and no more, while spending years that could have sheltered a Canadian home on which every dollar of Canadian tax is real. An exempt gain also has no Canadian tax to absorb the Mexican tax, which then becomes a pure cost. The case for designating the Mexican house is strongest where Mexican tax is low relative to Canadian tax on the same sale, as when a strong peso has inflated the Canadian gain, or where the Canadian home has gained little. Run both properties with real figures before the sale.

How is rental income from a San Miguel property taxed in Canada?

Article 6 of the convention lets Mexico tax income from letting immovable property situated in Mexico, and Canada taxes the same rent as part of your worldwide income.

It goes on Form T776, Statement of Real Estate Rentals, in Canadian dollars: gross rents on line 12599 of the return and net rental income on line 12600, a co-owner entering the gross for the whole property and their share of the net. The CRA’s rental guide, T4036, sets the limits that bite on a part-time holiday let. Expenses must be incurred to earn income and the personal-use portion is excluded; there is no rental loss where you let below market to someone you know or without a reasonable expectation of profit; and capital cost allowance cannot create or increase a rental loss. T4036 also explains when letting with services becomes business income, which changes the forms and can change how foreign tax is treated.

The Mexican credit works as on a sale, with two differences. First, only the income tax is creditable. Of the Mexican stack on our rental income tax page, federal income tax withheld by a platform or paid on a Mexican return is an income tax. The 16 per cent IVA on a furnished let, Guanajuato’s 4 per cent lodging tax and San Miguel’s 45,000 peso annual lodging permit are not, on the wording of subsection 126(7), income or profits taxes. Whether any of them is a deductible expense is a question for your accountant.

Second, gross against net. Mexican platform withholding is reported to be taken from gross receipts; Canada taxes net rent. Where the Mexican income tax exceeds the Canadian tax on the net rent, the excess does not carry over, though subsection 20(12) lets you deduct foreign tax on income from property from that income instead of crediting it. The subsection 20(11) rule, which turns foreign tax above 15 per cent of an individual’s foreign income from property into a deduction rather than a credit, expressly excludes real or immovable property.

One Canadian rule does not reach you. Section 67.7, which since 2024 denies expenses of short-term rentals operating without a required licence or permit, defines residential property as property located in Canada. A San Miguel listing without its municipal permit is outside that rule. It is not outside Guanajuato’s.

Starting to let a house you have lived in triggers subsection 45(1): a deemed sale at fair market value, which can produce a Canadian gain in the year the letting starts. Subsection 45(2) lets you elect that no change in use occurred. The CRA’s folio says capital cost allowance should not be claimed for years the election covers, and that the house can stay eligible as a principal residence for up to four of those years provided you remain resident in Canada. And a house let for most of the year becomes reportable on Form T1135.

What happens if I move to San Miguel permanently and leave Canada?

Canada’s departure tax reaches the Mexican house and not the Canadian one.

The CRA says you usually become non-resident on the latest of three dates: when you leave Canada, when your spouse or partner and dependants leave, and when you become resident in your new country. For that year you report world income for the resident part; afterwards, Canada taxes you only on Canadian-source income. Form NR73 exists if you want the CRA’s view of your status.

On ceasing residence, paragraph 128.1(4)(b) deems you to have disposed of each property you own at fair market value and reacquired it at the same amount. Real property situated in Canada is excepted. A house in San Miguel is not.

The foreign tax credit works differently here. The CRA’s folio, at ¶1.63, treats the gain from a deemed disposition on emigration as Canadian-source income, so no Mexican credit is available at departure. Instead, subsection 126(2.21) applies when you later sell, as a non-resident, real property outside Canada that you were deemed to reacquire on leaving: Mexican income tax on that sale that can reasonably be regarded as relating to the gain accrued while you were resident can be deducted from the departure-year Canadian tax, up to the tax the deemed disposition caused. Relief arrives years after the tax, and only with the Mexican sale documents to support it.

The convention adds a Mexican-side relief. Article 13(8) lets an individual who ceases to be resident in one country, immediately becomes resident in the other, and is taxed in the first on a deemed alienation, elect to be treated in the second as having sold and repurchased the property at fair market value immediately before arriving. Read with Canada’s departure tax, that is a stepped-up Mexican basis for the gain Canada has already taxed. We could not establish how SAT or a San Miguel notario applies the election in practice, or when it must be made. Raise it with a Mexican contador before you leave.

Once Mexico treats you as its tax resident, the Mexican rules on a sale change, including access to the principal-residence exemption described on our capital gains page. The immigration route, which is separate from both tax systems, is in residency and visas.

What records should a Canadian owner keep?

The CRA’s general rule is at least six years. For capital property its information circular IC78-10R5 goes further: records supporting cost should be kept until six years after the last tax year in which the transaction could enter any tax calculation. For a house held twenty years, the purchase file lives for twenty-six. Most of it does double duty.

What we could not establish

• How many Canadians own in San Miguel, or how they rank among foreign buyers. No source publishes a buyer-nationality split for this market, and census counts of recent arrivals from Canada are implausibly low. We make no claim.
• Any federal or provincial marginal rate. The worked example uses a labelled assumption.
• How the T1135 threshold applies to spouses who co-own one house. The CRA’s published answer on joint ventures applies the test per party on the cost of what each owns; it does not address spouses and a single foreign home.
• Whether Mexico honours the Article 13(8) election in practice, and by what procedure.
• Mexico’s domestic tax-residency test, which decides whether Mexico also claims you. Not verified.
• The Mexican income tax rate on rent paid to a non-resident. Our rental page explains why it declines to print one, and we follow it.
• Whether the CRA would deny credit for Mexican tax because a cheaper Mexican method was available and not chosen. The CRA’s folio addresses payments a treaty forbids, not a domestic election left unused. We found no statement either way.

The standing note

This is published research, not tax advice. It draws on the Income Tax Act as consolidated on 3 September 2026, the CRA’s current guidance and folios, and the Canada–Mexico convention as Finance Canada publishes it, which Finance notes has no official sanction. Rates, thresholds and CRA positions change, and every case above turns on facts, beginning with where you are resident and how the house is used.

A Canadian owner in San Miguel de Allende should engage a Canadian CPA familiar with Mexican-source income, ideally one who will speak to a Mexican contador before the sale, because the decision that moved the most money in the example above is made in Mexico. Your notario is the authority on the Mexican transaction. Where this page and your advisers differ on your facts, they are right and we are general.

We are not a brokerage, earn no commission on any purchase or sale, and have no interest in whether you buy, let or sell. The quarterly SMA Wealth Intelligence Report carries the market figures this page deliberately leaves out.