Taxes for Non-Residents
TAX CONSIDERATIONS FOR REAL ESTATE INVESTMENTS BY NON-RESIDENTS OF CANADA
Canadian income taxes are complex and the taxation of Canadian real estate depends on whether the use of the property is for a principal residence, an active business or as a rental property. This article should be of interest to non-residents of Canada owning Canadian real estate or Canadian property managers managing property for their non-resident clients or relatives.
If the property is used as a home and a principal residence as part of landing in Canada as a new immigrant, any gains on afuture sale will not be taxed. If the property was first used as a rental property and then changed to a principal residence, taxes will apply on any gains calculated from the cost on the date purchased, to the fair market value at the date of the change in use.
The distinction is not always clear what is business income or rental income, however, it is important because the tax treatment is different. Generally, the greater the size and extent of the rental properties and the time required for service and management, the greater the likelihood you are operating a business.
Non-resident corporations carrying on a business in Canada through (a) a local corporation, are taxed at the same rates as applied to Canadian corporations not eligible for the small business deduction, or (b) an unincorporated foreign branch, will be taxed at 25% on profits, which is subject to a reduction by any tax treaty. Distributions of dividends paid to foreign parent companies are subject to an additional withholding tax.
A non-resident earning rental income has a choice of how the income is taxed:
(a) Pay 25% on the gross rents including recoverable expenses received OR
(b) Make an annual election on a prescribed form that must be filed to Canada Revenue Agency (CRA) by January 1st every year to pay tax on the net rental income by filing a Canadian income tax return for the net rental income only. If the tax return is filed late or not at all, the non-resident will be taxed 25% of the gross rents plus interest and penalty.
If the election is made by a non-resident individual, the individual will be taxed at graduated tax rates normally applicable to Canadian residents starting at about 23% up to $42,707 CDN and reaching about 43%, on the net rental income portion exceeding about $132,406 CDN. If the election is made by a non-resident corporation, the combined federal and provincial corporate income tax rate is approximately 29.5% to 35.5% on the net rental income, depending on the province.
Withholding Tax Procedures for Rental Income
A 25% withholding tax on the monthly rent collected is normally remitted to the CRA. However, if you and your appointed property manager/agent file the election form (mentioned in (b) above) by January 1st, to pay tax on the net rent on a Canadian tax return, it is possible to reduce or eliminate the monthly withholding tax by including an estimated budget that shows little or no rental profit. The actual net rental income on the tax return will adjust the final tax calculation.
Sale of Real Estate by a Non-resident
The tax treatment of any gains on the sale of Canadian real estate depends on whether the gain is treated as a capital gain or business income. Generally, if the non-resident is actively buying and selling real estate as inventory, then the operation is likely to be considered a business and will be taxed on the full amount of the gain.
If there is a capital gain, the normal Canadian tax rates will be applied to 50% of the gain for sales after October 17, 2000. However, a non-resident is required to pay an estimate of the tax before the sale, an amount of 25% of the gain. Upon payment, the CRA will issue a Tax Clearance Certificate to the vendor. If a purchaser does not receive this Certificate from the vendor, the purchaser, through their lawyer, is required to withhold tax and remit as tax to CRA 33.3% or more of the gross purchase price from the vendor!
Before April 30th following the calendar year of the sale, the vendor should submit a Canadian income tax return reporting the gain minus the actual selling expenses (sales commission, lawyer's fee, etc..) as this will result in a tax refund of part of the taxes that were paid on closing, back to the vendor.
These are specialized procedures that require experienced tax professionals to ensure the Tax Clearance Certificates are approved quickly and to ensure the lowest amount of tax is paid.
Goods and Services/Harmonized Sales Tax (GST/HST)
Subject to a formula based on price, GST/HST of about 5% to 15% (after July 1, 2010) applies on the purchase and sale of newly built homes that were never previously occupied and any commercial property. There is no GST/HST on residential rent. There is GST/HST for rent on commercial property if the annual gross rent received by the property owner is over $30,000 per year and he has a registered GST/HST number.
GST/HST ranges from 5% to 15% as it depends on the province where the property is located. GST/HST is 13% in Ontario and after April 1, 2013, 5% in British Columbia.
The information presented here is general in nature and is not intended to replace professional advice where facts and circumstances may be different. No action should be taken without consulting your Chartered Accountant. Enquiries related to this article, other tax or business matters and career opportunities should be made by e-mail to Jonathan Jones at firstname.lastname@example.org