REALWorld Law

Taxes

Ongoing taxation

What taxes (if any) are payable by the owner of real estate on a recurring basis and can these be reduced or offset in any way?

Canada

Canada

Income Tax

Income tax on rental income is levied by the Canadian federal government and all provincial governments. Canadian municipalities do not levy income tax. Rental income from a rental property is generally the profit from the property, subject to specific rules set out in the Income Tax Act (Canada) (the Act).

Canada generally taxes based on residence. A Canadian resident will be required to pay tax on rental income from a property whether the property is located in Canada or elsewhere. If the property is outside Canada, Canada will generally allow an offsetting foreign tax credit against Canadian taxes in respect of any foreign tax paid on the same income.

A non-resident of Canada typically will be required to pay Canadian withholding tax equal to 25% (unless an applicable bilateral income tax treaty, if any, provides a lower rate) of the gross amount of rental income from real estate situated in Canada. The withholding tax must be withheld from each rental payment and remitted to the Canada Revenue Agency (CRA) for the non-resident’s account. In many cases the non-resident may, by filing an undertaking with the CRA, arrange to pay tax based on net rental income rather than under the withholding tax regime.

The combined rate of federal and provincial income tax on rental income will vary depending on the relevant province, and whether the taxpayer is an individual (including most trusts), corporation, or partnership.

Individuals pay tax at graduated rates. The top rate is approximately 50%, depending on the province.

Corporate tax rates average around 30%, again depending on the province. Certain private corporations will be subject to an additional 10.67% refundable tax on rental income, which is then refunded as the corporation pays certain taxable dividends to its shareholders.

Most trusts pay tax at the top individual rate. However, trusts can and frequently do reduce their income to nil annually by distributing all of their income to their beneficiaries, each of whom is then taxable on the beneficiary’s share of income at the rate applicable to the beneficiary.

Partnerships (including limited partnerships and limited liability partnerships) are not generally taxable, but are required to compute income at the partnership level as if the partnership were a person, and then allocate its income to its partners in accordance with their rights as partners. Each partner then pays tax on the partner’s share of the partnership’s income at the rate applicable to the partner.

Income tax is not a deductible expense. Commercial landlords often factor anticipated income tax cost into the rent charged in order to ensure an appropriate rate of return on their investment.

Property Tax

Canadian provinces levy annual property tax, typically as a percentage of assessed value. Property tax rates vary widely depending on the province, and the location and classification of the property. Property tax is generally payable by the owner of the property.

Property tax expense incurred in the course of earning income from a business or property is generally deductible for income tax purposes. Restrictions on deductibility may apply where the real property is acquired for resale or development.

“Speculation and Vacancy Tax” in British Columbia

British Columbia has enacted an annual “speculation and vacancy tax” on residential real estate in the Vancouver region and in certain other specified areas in British Columbia, subject to various exemptions, including property under construction or renovation and property occupied under a qualifying long-term tenancy.

The tax is levied on foreign owners annually at a rate of 0.5% of the property value in 2018, and 2% in 2019 and subsequent years (non-foreign owners will also be subject to the tax, but at lower rates). Foreign owners who report income in British Columbia may be able to offset a portion of the tax with a tax credit against British Columbia income tax (non-foreign owners may also be eligible for a tax credit under certain circumstances).

Municipal Vacancy Taxes

Separate from British Columbia’s speculation and vacancy tax, vacant residential property in the city of Vancouver (meaning property that has been unoccupaid for more than six months during the taxation year) will be subject to an empty homes tax of 3% on the property’s assessed taxable value for the year. This tax is also subject to certain exemptions such as the death of the ‎registered owner, development or major renovations, the registered owner is in care, occupancy is for ‎full-time employment, there is a transfer of the property, the property is subject to court order, or the ‎property is a limited use residential property. ‎

Similar vacancy taxes laws are in effect for in the City of Toronto, Ottawa and Hamilton, at a rate of 1%. The Peel Region is currently also contemplating a vacancy tax.

Underused Housing Tax

Beginning 1 January 2022, certain corporations and individuals (including non-Canadian individuals) are required to file an “underused housing tax return” for each directly or indirectly owned residential property, and to pay anunderused housing tax of 1% on such property if they are vacant or underused during the year.

A property will be exempt from this tax if:

  • it is the primary place of residence for an individual or their spouse or ‎common-law partner, or for a child who is attending a ‎designated learning institution; or
  • at least 180 days in the calendar year are included in one or more ‎”qualifying occupancy periods”(meaning at least one month in a calendar year during which a qualifying occupant, such as a tenant, a spouse with a Canadian work permit, or a spouse, parent or child that is a citizen or permanent resident of Canada has continuous occupancy of the residential property)

There are a number of “excluded owners” that are not subject to the underused housing tax, most notably Canadian citizens and permanent residents of Canada (unless such persons own the property in their capacity as trustees ‎‎of a trust or as partners in a partnership). A number of other exemptions ‎may also apply.