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 ESTATE – INSIGHTS FOR NON-RESIDENTS Agenda General Market Conditions Taxation of Purchase and Sale Clearance Certificate Procedures Rental and Financing Sales Tax Investment Vehicles for Canadian Real Estate Questions 2
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS General Market Conditions § Investment in real estate remains strong in many § Since 2015, CRA audits have identified over $1 billion in provinces in Canada, especially in Vancouver, Toronto additional gross taxes related to the real estate sector and Montreal § Provinces are combating money laundering § Measures have been implemented for areas such as and tax evasion and introducing legislation to disclose Toronto and Vancouver that are meant to slow the who owns real estate through corporations, trusts and market and lower the cost of residential housing partnerships, such as legislation proposed in BC, referred to as the Land Owner Transparency Act § The Canada Revenue Agency (CRA) is focusing on initiatives in the Toronto and Vancouver areas aimed at § Quebec has proposed measures requiring the disclosure ensuring taxable capital gains derived from the sale of of nominee agreements that have tax consequences real estate are identified and money made from real which are commonly used in real estate transactions, estate flipping is reported as income with penalties for non-compliance 3
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS TAXATION § Land Transfer Tax is imposed in most provinces and territories at the time ON PURCHASE of purchase § The Land Transfer Tax is usually calculated as a percentage of the value of consideration paid § 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 4
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS TAXATION § A determination must be made of whether the gain from the sale is a capital gain or ON SALE 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 5
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS TAXATION § A tax return is required to be filed in Canada to report any taxable capital ON SALE 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 6
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Clearance procedures § Applicable when there is a disposition § Real property situated in Canada is a § An exception to the purchaser of real property by a non-resident Taxable Canadian property (TCP) withholding obligation applies where vendor the non-resident provides a When acquired from a non-resident, the § compliance certificate that § Requires reporting before or within 10 purchaser must withhold 25% of the establishes that the non-resident paid days of the sale and withholding of tax proceeds if it is a non depreciable capital appropriate tax or posted security by purchaser if a clearance certificate is property, and 50% if it is inventory or a not provided to purchaser depreciable property. § Reporting is made to CRA, and where § For Quebec, the rates are 12.875% the real property is located in Quebec, and 30% respectively also to Revenu Quebec 7
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Clearance procedures § Application for a compliance certificate § Quebec has similar rules where the § To obtain the certificate, the non- is made on the following forms property is located in Quebec, except resident vendor must make a payment separate forms and different rates of tax or post security for the tax § Form T2062, Request by a apply Non-Resident of Canada for a Certificate § The amount of the payment/security of Compliance Related to the Disposition § Penalties and interest, and or for capital gains is 25% of capital gain of Taxable Canadian Property, and imprisonment can apply for non- (selling expenses are ignored) compliance § Form T2062A, Request by a Non-resident § For recapture of capital cost allowance of Canada for a Certificate of Compliance (CCA), the amount of tax/posted Related to the Disposition of Canadian security Resource Property and Depreciable is computed at the non-resident’s Taxable Canadian Property federal tax rates on the recapture of CCA 8
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Rental § It is important to determine whether the income from the rental activities constitute carrying on business in Canada for income tax purposes, or whether T A X A T I O N 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 9
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Rental T A X A T I O N § 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 11
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Rental T A X A T I O N § 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 12
TAXATION OF CANADIAN REAL ESTATE – INSIGHTS FOR NON-RESIDENTS Financing T A X A T I O N § 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 13
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