TAXATION OF CANADIAN REAL ESTATE INSIGHTS FOR NON-RESIDENTS SCHWARTZ - - PowerPoint PPT Presentation
3-6 JULY 2019 TAXATION OF CANADIAN REAL ESTATE INSIGHTS FOR NON-RESIDENTS SCHWARTZ LEVITSKY FELDMAN LLP Partnership of chartered professional accountants I Montreal, Toronto HLB TAX CONFERENCE BUDAPEST, HUNGARY TAXATION OF CANADIAN REAL
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§ Investment in real estate remains strong in many provinces in Canada, especially in Vancouver, Toronto and Montreal § Measures have been implemented for areas such as Toronto and Vancouver that are meant to slow the market and lower the cost of residential housing § The Canada Revenue Agency (CRA) is focusing on initiatives in the Toronto and Vancouver areas aimed at ensuring taxable capital gains derived from the sale of real estate are identified and money made from real estate flipping is reported as income § Since 2015, CRA audits have identified over $1 billion in additional gross taxes related to the real estate sector § Provinces are combating money laundering and tax evasion and introducing legislation to disclose who owns real estate through corporations, trusts and partnerships, such as legislation proposed in BC, referred to as the Land Owner Transparency Act § Quebec has proposed measures requiring the disclosure
which are commonly used in real estate transactions, with penalties for non-compliance
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§ Land Transfer Tax is imposed in most provinces and territories at the time
§ The Land Transfer Tax is usually calculated as a percentage of the value
§ A 15% non-resident speculation tax may apply for residential property situated in certain areas of southern Ontario for acquisitions by individuals who are not citizens or permanent residents of Canada and foreign entities § In certain urban areas of British Columbia a speculation and vacancy tax may apply to residential property owners and an annual declaration is required – the rate is 2% of the assessed value for foreign investors
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§ A determination must be made of whether the gain from the sale is a capital gain or business income § Business income is fully taxed § Capital gain is taxable at 50% of the gain (proceeds minus adjusted cost base minus selling expenses) § A number of factors are looked at to determine whether the gain is on account of income or capital § The most important factor is the intention at the time of purchase - some other considerations include nature of business, profession of the taxpayer and associates, the holding period, factors motivating the sale, and how the property is used § The effective rate of tax on a gain from the sale will depend on the ownership structure and whether it is treated as a taxable capital gain or business income
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§ A tax return is required to be filed in Canada to report any taxable capital gain and recapture of depreciation where the recapture relates to income from business. A provincial tax return is applicable for the province of Quebec and Alberta § A special tax return is required to be filed to report the recapture of capital cost allowance, where the rental income earned from the real property is considered income from property
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§ Applicable when there is a disposition
vendor § Requires reporting before or within 10 days of the sale and withholding of tax by purchaser if a clearance certificate is not provided to purchaser § Reporting is made to CRA, and where the real property is located in Quebec, also to Revenu Quebec § Real property situated in Canada is a Taxable Canadian property (TCP) § When acquired from a non-resident, the purchaser must withhold 25% of the proceeds if it is a non depreciable capital property, and 50% if it is inventory or a depreciable property. § For Quebec, the rates are 12.875% and 30% respectively § An exception to the purchaser withholding obligation applies where the non-resident provides a compliance certificate that establishes that the non-resident paid appropriate tax or posted security
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§ Application for a compliance certificate is made on the following forms § Form T2062, Request by a Non-Resident of Canada for a Certificate
§ Form T2062A, Request by a Non-resident
Related to the Disposition of Canadian Resource Property and Depreciable Taxable Canadian Property § To obtain the certificate, the non- resident vendor must make a payment
§ The amount of the payment/security for capital gains is 25% of capital gain (selling expenses are ignored) § For recapture of capital cost allowance (CCA), the amount of tax/posted security is computed at the non-resident’s federal tax rates on the recapture of CCA § Quebec has similar rules where the property is located in Quebec, except separate forms and different rates of tax apply § Penalties and interest, and or imprisonment can apply for non- compliance
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TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS
§ It is important to determine whether the income from the rental activities constitute carrying on business in Canada for income tax purposes, or whether the income from such activities is considered income from property § If it is income from business, it subject to tax under Part I of the federal income tax act – tax is generally imposed at rates equivalent to those applicable to Canadian-resident taxpayers § The distinction between income from business and income from property depends upon degree of activity (time, attention, services) of the non-resident in earning the income § Rental income that is considered income from property and paid to a non- resident of Canada is subject to a withholding tax (Part XIII tax) at a rate of 25% of the gross rent § The non-resident person may file the Form NR6 to reduce the withholding tax based on the net rental income, excluding CCA, through an undertaking to file a tax return under section 216 of the Income Tax Act § An NR4 is issued to the non-resident by the payer of the rent to report the non- resident withholding tax deducted on behalf of the non-resident
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§ Where an undertaking is made to file a section 216 return, it must be filed within 6 months of year end - the section 216 return will report the actual rental income earned, claiming deductible expenses, including CCA § Where the withholding tax deducted per the NR4 exceeds the Part I tax calculated on the net rental income reported on the section 216 return, a refund will be claimed § Where the Part I tax exceeds the non-resident withholding tax deducted per the NR4, a balance will be owed by the non-resident § For Quebec tax purposes, a non-resident corporation will be deemed to have an establishment in Quebec and subject to tax on it taxable income, where it owns an immoveable situated in Quebec that is used principally to the purpose of earning or producing gross revenue that is rent
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§ If an undertaking is not made, the non-resident can still choose to report net rental income and pay tax under Part I on the net amount, however, the return must be filed within two years after the end of taxation year § In this case, the non-resident withholding tax deducted on the gross rental payments will be claimed against the Part I tax and is beneficial where a refund is expected § If a return is filed under section 216, a net rental loss cannot be carried forward or back, and can only be applied against other Canadian net rental income – this is managed through discretionary deductions § Where a return was filed under section 216 and a deduction claimed for CCA, a return under Part I is required for the year of the disposition of the property - the result is that the non-resident will be subject to tax on the recapture of CCA
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§ Interest incurred on debt to purchase a residential property that is personal-use property is not deductible § If the real estate property is rented and it is income from business, or a return is filed under section 216, the interest will generally be deductible § In certain circumstances, the so-called “thin capitalization rules” may apply to reduce the amount of deductible interest (general limit of 1.5:1 debt to equity) § Where interest is paid to a related non-resident, it may be subject to non-resident withholding tax and the rate may possibly be reduced by virtue of a tax treaty with Canada
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§ For sales tax, the general rule is that supplies of real property in Canada are taxable, unless a specific exemption is provided § Used residential property and most supplies of real property by charities, non-profit organization, universities, schools and hospital are exempt from sales tax § The Good and Service Tax (GST) rate is 5%, the Quebec Sales Tax (QST) rate is 9.975% and the Harmonized Sales Tax (HST) rate varies among the provinces that have HST § The HST rate in Ontario is 13%. HST also applies in the provinces of New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island § The GST rate in provinces and territories that do not charge HST is 5% § Short-term residential rentals (i.e., rentals for personal accommodations for period less than a month) are subject to GST, HST, and QST § Long term residential leases (more than one month), low-cost residential accommodations (e.g., less than $20 day for rooming houses) and condo/co-op fees are exempt supplies
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§ Choosing a vehicle to invest in Canada will be driven by the purpose of acquiring the real estate and will impact the taxes payable throughout the life cycle of the investment § Common structures used for investing in real estate include corporations, partnerships and trust § The appropriate vehicle in any given situation is fact specific § The use of a corporation as opposed to a partnership means that if business losses are incurred, they do not flow out to the shareholder § The use of a corporation should result in lower income tax rate than the tax rate payable by a trust or an individual § The advantage of a partnership is that business losses of the partnership flow through to the investor § The discussion that follows assumes the the rental income is income from property and not business income and the property is located in Quebec
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Non-resident Individual § Gross rental income subject to withholding tax of 25% § Possibility to reduce the withholding tax if an election to file tax returns is made § Need clearance certificate upon disposition whether on account of income or capital § Taxation upon death § Progressive tax rates upon sale or death up to 27% on capital gain and 49% on rental income. § No further taxation upon repatriation of funds
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Non-resident Trust § Gross rental income subject to withholding tax of 25% § Possibility to reduce the withholding tax if an election to file tax returns is made § Need clearance certificate upon disposition whether on account of income or capital § Allows for flexibility to distribute income to different beneficiaries § No tax upon death if discretionary trust § Effective tax rates upon sale or death of 27% if capital gain and 53% on rental income § No further taxation upon repatriation of funds § Planning is required to deal with 21 year deemed disposition rule
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Canadian Trust § Need majority of Canadian trustees § No withholding tax on gross rents § Must file Canadian tax returns § No clearance certificate upon disposition of property § Special tax of 36% upon distribution of income to non-resident beneficiaries, in addition to regular withholding tax § Allows for flexibility to distribute income to different beneficiaries § No tax upon death if discretionary trust § Taxed at top marginal rates of 27% on capital gain and of 53% on rental income § Planning may be required to deal with 21 year deemed disposition rule
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Canadian Corporation (owned by non-resident individual) § No clearance certificate upon sale of property § Taxation upon death on the shares of the corporation (27%) § Withholding tax upon payments of dividends to non- residents (25%; may be reduced by Treaty) § Taxed upon sale at rate of 13% if capital gain and 27% on rental income
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS
Non-resident Corporation § Withholding of 25% on gross rents § Subject to clearance certificate upon disposition § Taxation upon death (27%) § Taxed upon sale at rate of 19% if capital gain and 37% on rental income
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§ Investing in real estate in Canada requires many considerations § The Canadian tax authorities are focused on ensuring that proper tax is collected where due § The tax compliance consideration and investment vehicles vary depending on the nature of the investment in the Canadian real estate § The laws are constantly changing, so using a team of specialists, including a real estate broker, a lawyer and a tax specialist is important to navigate the waters
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The SLF Montreal tax department is composed of a group of dedicated tax specialists Samy Amar, CPA, CA, TEP
Partner in charge, Tax 1980, Sherbrooke Street West, 10th floor Montreal, Quebec, Canada samy.amar@slfcpa.ca 1-514-788-5632
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