Introduction – Acquisition of Real Estate and Canadian taxation
Purchasing Canadian real estate is often a popular and profitable type of investment for both Canadian and non-Canadian residents. That said, there are a number of different taxes and compliance requirements involved when the real estate is owned by a non-Canadian resident. In particular, being a non-resident has tax implications on the acquisition, rental, and sale of Canadian real estate. There are also additional tax return and tax compliance requirements with regards to withholding tax on both the rental and sale of the real estate. The primary difference with respect to Canadian non-residents on the acquisition of real estate is the existence of additional taxes on non-residents such as the foreign buyer tax in British Columbia (Metro Vancouver, Fraser Valley, Okanagan, Nanaimo, and Capital Regional District) and the non-resident speculation tax in Ontario (Greater Golden Horseshoe Region).
Non-Resident Taxation of Canadian Real Estate Income: B.C. Foreign Buyer’s Tax
In B.C., the foreign buyer’s tax is 20% of the fair market value of the real property and applies to foreign nationals, foreign corporations, and taxable trustees. In this context, foreign nationals refers to individuals who are not a Canadian citizen or a permanent resident of Canada; foreign corporations are those that are either not incorporated in Canada, or are controlled directly or indirectly by one or more foreign entities, unless the shares of the corporation are listed on a Canadian stock exchange; and taxable trustees are either foreign nationals or corporations that hold title in trust for beneficiaries, or Canadian citizens or permanent residents who are trustees of a trust where a beneficiary of the trust is a foreign national or foreign corporation. The foreign buyer’s tax applies to three types of properties:
- properties entirely classified as residential by BC Assessment have the tax applied on the fair market value of the entire property;
- properties classified as farm land by BC Assessment where the property is also used as an owner’s or farmer’s dwelling have the tax applied on the value of the residential improvement plus 0.5 hectares of land; and
- properties that are a mixed class that include a residential property have the tax applied only on the fair market value of the residential portion.
For properties that are acquired jointly by multiple taxpayers where some taxpayers are liable for the foreign buyer’s tax while others are not, the foreign buyer’s tax applies proportionately to the liable parties’ interests. For example, if a foreign national is acquiring a 20% interest in a $1,000,000 residential property with a Canadian citizen acquiring the remaining 80%, the 20% foreign buyer’s tax would only apply to 20% of the fair market value and result in an additional tax of $40,000. There are also a number of tax exemptions available and you should speak to one of our experienced Canadian tax lawyers to see if they apply to you. Note that B.C. also has a speculation & vacancy tax that will be covered under rental costs in Part II.
Non-Resident Taxation of Canadian Real Estate Income: Ontario Non-Resident Speculation Tax
With the Ontario non-resident speculation tax, a 15% additional tax is levied on foreign entities and taxable trustees. In this case, a foreign entity is a foreign corporation or a foreign national, and the definitions of those terms, along with taxable trustee, are essentially the same as under the B.C. foreign buyer’s tax. In Ontario, the non-resident speculation tax applies to transfers of land which contain at least one, but not more than six single family residences. For example, this would apply to condos, single family residences, and duplexes; however, this would not apply to the transfer of an entire rental apartment building containing more than six single family residences, or a hotel. The non-resident speculation tax also does not apply to agricultural land, commercial land, or industrial land. Where a particular property is a mix of qualifying residential land and another type of land, the non-resident speculation tax applies only to the residential portion – e.g. a property that is worth $1,000,000 and has a residential portion worth $400,000 and a commercial portion worth $600,000 would have the non-resident speculation tax apply to only the $400,000 for a total tax liability of $60,000. Note that a key difference between the Ontario non-resident speculation tax and the B.C. foreign buyer’s tax is that, as long as any purchase of a property, no matter how small their interest, is a foreign entity or taxable trustee, the non-resident speculation tax applies on the entire fair market value of the residential portion of the property. Using the same example as before, with a foreign national acquiring 20% of a $1,000,000 residential property with the remaining 80% owned by a Canadian citizen, the tax would apply on the entire $1,000,000, resulting in additional tax of $150,000. That said, there are exemptions for foreign spouses of Canadian citizens/permanent residents as well as nominees under the Ontario Immigration Nominee Program and protected persons under the Immigration and Refugee Protection Act as well as rebates of the tax for foreign nationals who become permanent residents of Canada, international students, and foreign nationals working in Ontario. Call our top Canadian tax firm to learn more about these exemptions.
Pro Tax Tip – Risk for Joint Purchases of Real Estate
Due to the significant increase in cost from these acquisition taxes, it is more important than ever to determine whether they apply to you before you purchase a real property in Canada. While there are a number of exemptions, they do not always apply in a consistent manner and, in Ontario, situations where two purchasers who individually might fall under a particular exemption or be able to claim a rebate, may together not be able to get either of them. Furthermore, it is a somewhat common practice for a parent or other higher earning individual to help a primary purchaser qualify for a mortgage by taking on a 1% interest in a new property. In cases where that higher earner is a foreign national or entity, these additional taxes will apply – while it may not make a significant difference in B.C., as that 1% interest would only increase the cost by 0.2% of the fair market value, in Ontario, that 1% interest will result in an additional tax of 15% on the entire fair market value. Where there is any risk that one of these taxes might apply, contact our professional Canadian tax law firm first for tax advice and tax guidance.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."