An individual/organization/company may invest in Canadian real estate either directly or indirectly through any of many different legal entities including corporations, unlimited liability companies, general and limited partnerships, limited liability partnerships, and trusts (including real estate investment trusts). The owner may be a Canadian resident or a foreign individual or entity.
Beginning 1 January 2023 however, non-Canadiansare prohibited from buying residiential property in Canada. The prohibition is anticipated to be in place for two years. A non-Canadian means generally:
(a) an individual that is neither a Canadian citizen nor resident in Canada;
(b) a corporation that is not incorporated in Canada; or
(c) a private corporation incorporated in Canada but that is controlled by a person described in (a) or (b).
There are several exceptions such as, but not limited to, temporary residents who satisfy certain conditions, refugees, diplomatic or consular purposes and Non-Canadian individuals with Canadian spouses or common law partners. Furthermore, the prohibition will not apply to agreements of purchase and sale which are entered into before 1 January 2023. Penalties for non-compliance include a fine of up to $10,0000 as well as the forced sale of the residential property.
Last modified 22 Mar 2024
No Canadian federal or provincial income tax applies to the acquisition of real estate.
Certain provinces levy tax on the registration of an interest in real property in the relevant provincial land titles office. At least one Canadian city, Toronto, levies a similar registration tax in addition to the provincial tax. Ontario levies an additional 15% registration tax on foreign purchasers of residential real estate in the Toronto region, and British Columbia levies an additional 20% registration tax on foreign purchasers of residential real estate in the Vancouver region and in certain other specified areas in British Columbia.
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A 5% federal goods and services tax (GST) generally applies to the purchase of Canadian real property. Certain provinces have harmonized their sales tax regimes with the federal GST. A purchase of real property in these provinces would generally be subject to additional tax at rates varying from 8–10%, depending on the province. One province, Quebec, has harmonized in a different manner, where instead of having the additional tax levied under the federal GST legislation, it levies Quebec sales tax under Quebec legislation that is substantially similar to the federal GST.
Certain sales of real estate are exempt from GST, most notably sales of used residential real estate.
Generally, the purchaser can recover GST payable at the time of purchase (if any) by claiming an equivalent input tax credit (ITC) in its GST return, provided that the purchaser is registered for GST purposes and acquires the property in the course of a commercial activity. In many cases involving commercial real property the purchaser can self-assess, where the purchaser does not pay GST to the seller on purchase but instead reports the GST and claims an ITC in the relevant GST return, with the offset of those amounts resulting in no GST paid in respect of the purchase. Otherwise, the purchaser must pay the GST at the time of purchase, and subsequently claim the offsetting ITC as a credit against its overall GST liability when filing its relevant GST return. GST returns must be filed monthly, quarterly, or annually, depending on the revenue of the purchaser’s business.
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Generally, no other statutory costs or charges are payable on completion of a purchase of real estate.
Last modified 22 Mar 2024
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.
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.
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).
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.
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:
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.
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Ongoing costs would be those normally associated with ownership of real estate – for example repair and maintenance costs or property management fees.
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The typical type of income from real property is rent. Other types of income related to, if not actually from, real property could include property management fees, fees for facilities on the property (eg fitness clubs), and fees for associated services (eg laundry, food preparation or delivery).
Last modified 22 Mar 2024
See the Income tax section.
Last modified 22 Mar 2024
Shareholders must include taxable dividends received on shares of a corporation in income.
If the shareholder is a corporation resident in Canada it will generally be entitled to deduct a corresponding amount from its taxable income. In some circumstances it may be subject to a refundable 38 1/3% tax on dividends received, and be entitled to a refund of that tax as it pays certain taxable dividends to its shareholders.
Dividends paid to an individual or trust that is resident in Canada are subject to a gross-up and dividend tax credit intended to offset corporate tax paid by the corporation.
Dividends paid by a resident Canadian corporation to a non-resident are subject to 25% withholding tax on the gross amount of the dividend, unless an applicable bilateral income tax treaty, if any, provides a lower rate.
A shareholder who receives a distribution from a corporation as a reduction of capital on the shareholder’s shares generally will not be taxable on the receipt. The shareholder will be required to reduce the shareholder’s adjusted cost base (ACB) of the shares by the amount of the distribution, and will be deemed to realize a capital gain equal to the amount, if any, by which the ACB thereby becomes negative. The shareholder would in that case be required to include one-half of the capital gain in income, to be taxed at normal rates.
Where a REIT distributes income to a beneficiary, generally the REIT will be entitled to deduct the amount of the distribution from its income, and the beneficiary will be required to include the amount in its income.
The beneficiary, if a Canadian resident, will generally be subject to income tax on the amount at normal rates. If a non-resident, the beneficiary will be subject to 25% withholding tax on the gross amount of the income distribution, unless an applicable bilateral income tax treaty, if any, provides a lower rate.
The above assumes that the trust satisfies the technical requirements set out in the Act to qualify as a REIT.
Last modified 22 Mar 2024
No.
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No.
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Canada taxes one-half of capital gains. A taxpayer that realizes a gain on the disposition of Canadian real property held as capital property will be required to include one-half of the gain (the taxable capital gain) in income and generally be subject to tax at applicable rates. For this purpose a capital gain is computed as the proceeds of disposition, minus the ACB of the property and reasonable costs of disposition. If the real property includes depreciable property – for example a building – that has been depreciated for tax purposes, any gain attributable to the building up to the total previously-deducted net tax depreciation will be fully taxable.
The tax rates and rules described under ‘Recurring Taxation – Ongoing Taxation – Income Tax’ will generally apply to the taxable capital gain included in the taxpayer’s income.
One hundred per cent of any realized gain on the disposition of real property held as a trading asset or acquired in the course of an adventure or concern in the nature of trade will normally be taxable at applicable rates.
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Coming soon.
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Are there any additional costs/charges (other than tax) payable if income generated from an investment in real estate is transferred to the shareholders or partners in the relevant vehicle and who are these charges payable to?
No.
Last modified 22 Mar 2024