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Published: February 27, 2023

Last Updated: March 16, 2023

Overview – A Canadian Tax Lawyer’s Guide to Tax Treatment of Halal Mortgages

Islamic or ‘halal’ financial products are growing globally and this is being driven by the peculiarity of these products in closing financial exclusion gaps affecting Muslims around the globe. These financial products are devoid of “riba” which roughly translates to “interest”, and it is prohibited by the Qur’an for practicing Muslims. So, customers who buy Islamic financial products enjoy products which, are not free, but are free of financial charges obtainable in non-Islamic financial institutions.

Accordingly, Islamic finance institutions have structured different types of Shari’ah (Islamic law) compliant products that meets the needs addressed by conventional financial institutions. And this includes mortgages.

Halal mortgage products are booming and solving housing challenges faced by Muslims in Western countries including the United States (US), the United Kingdom (UK) and more recently Canada. In 2020, a fintech start-up Manzil launched Canada’s first Halal mortgage fund, signalling the beginning of numerous opportunities for investments in Halal mortgages in Canada. Impressively, the industry is growing. In 2017, the value of Shari’ah-compliant mortgages in Canada was estimated at CA$2 billion (US$1.43 billion).

Halal mortgages in Canada, as well as other Islamic financial products, may be free from all conventional financial charges, but does fall under the rightful oversight of the Canada Revenue Agency (CRA). This is because transactions involving these products result in some form of income or transfer of ownership of property or some other values, which are captured by extant Canadian tax laws and rules.

Consequently, the CRA would naturally direct its focus to the boom in the usage of these products. Such eagle-eye focus could be misconstrued as unfairly targeting Muslim organisations, as alleged by civil rights groups in June 2021 over increased tax audits which unfortunately caused a disproportionate number of Muslim charities to lose their charitable status.

This article clarifies that halal mortgages in Canada are already captured under the existing Canadian tax rules. This article will briefly introduce the concept of halal mortgages in Canada and provides clarity as to the Canadian tax treatment of these products.

What is a Halal Mortgage in Canada?

The considerations which guide Muslims in the process of buying a home may be simple, yet complex. Issues ranging from the structure of the house needed, to other legal considerations are very essential. Most importantly, financing the choice home raises a myriad of issues which this article cannot comprehensively capture.

For those seeking shari’ah (Islamic law) complaint funding options, conventional mortgages do not ‘cut-the-deal’ because of the ‘interest’ charged on such products. However, halal mortgage in Canada is shari’ah-compliant as this product is structured to adhere to both Canadian law and the belief system of many Muslims.

A major misconception about halal mortgages in Canada is the free-for-all notion which it has been interpreted to be. Customers of this product are still required to pay carrying costs to a financial institution for the financing package rendered, to aid in the purchase of their home.

In fact, those who subscribe to halal mortgage products pay an amount comparable to what is obtainable under conventional mortgages, although with a different structure in terms of the source of the money and legal considerations.

How Does a Halal Mortgage Work: Halal Mortgage in Canada Reduces the Financial Exclusion Rate of Muslims who Find Various Conventional Financial Products Unreligious

Essentially, in halal mortgages, instead of paying interest, costumers could be said to be paying profit – a defined mark-up price, transparently agreed to between the Islamic financial institution and the customer – which is a novel idea in the conventional mortgage field.

There are three halal mortgage products. The first is called the Ijarah; a lease-based product, where a financier agrees to purchase and rent a property for the agreed periodic rental payment, which could be monthly or some other payment interval, with the aim of transferring ownership of the property at the end of the lease period to that customer for a nominal residual value. The Ijarah is usually structured in form of a lease.

The second is the Musharakah Mutanaqisah, a diminishing partnership-based product, where the property is jointly purchased by both the financier and the customer, who then pays property purchase and rental payments to the financier every month. Musharakah is structured in the form of a joint-partnership to purchase the property, but the customer has to make subsequent payments to the financier.

Both the Ijarah and Musharakah have adaptability issues under Canadian law for various reasons such as the attraction of double capital gains and land transfer taxation; the necessity for the financier to take property downside risks on the property and maintain their propriety interest of the property, amongst others. This is simply because both products still vest proprietary interest in the financier, either as a joint partner in a Musharakah structure or a lessor in the Ijarah structure.

The third option, Murabaha, is what is used in Canada. A Murabaha transaction is simply referred to as cost-plus financing. In such transactions, the parties are; the bank (financier), the client/customer (recipient) and the seller of the property (third-party).

Under Murabaha, a client identifies a property which he seeks to purchase, but does not have the necessary finances available as is the case with most home purchasers. The bank then purchases the property from the third-party and sells to the client for a price which consists of the original price of the property plus the mark-up or profit element.

For instance, Faisal, who intends to buy a house for CAD$350,000, can approach a bank to make the purchase. The bank can then buy the property at CAD$350,000 and sell to Faisal at CAD$360,000 which would then be paid either via instalments or bullet payment at maturity (as the term of agreement dictates).

As with conventional mortgages a down payment is usually made with the remaining payments made in instalments, again similar to a conventional mortgage. The mark up could be said to play the role which interest will usually play in a conventional mortgage, but it is not regarded as interest, which is prohibited in Islam, because of the structure as a purchase markup.

Furthermore, upon any potential default after the legal-due date, no additional charges are incurred. The best option for the Bank, if the respite given to make up the arrears has not yielded results, is to blacklist the client from buying further financial products in the future and to proceed to sell the property as would be the case if a conventional mortgagor defaulted on mortgage payments and the bank proceeded by way of foreclosure or power of sale.

These products expose an array of taxable issues. We will proceed to examine the tax implications of halal mortgage products.

Halal Mortgages in Canada Attract Land Transfer, Income, Capital Gains and Harmonised Sales Taxes; Hence the Tax Man gets a Huge Piece of the Pie

The tax burden on halal mortgage, especially Murabaha, could make the product unattractive. The first burden is the land transfer tax (LTT) which is payable based on the rates prescribed in provincial tax laws.

Very prominent is section 2 of the Ontario Land Transfer Tax Act (Act) 1990 (as amended). The section provides that where the financial institution acquires a property which is to be mortgaged to the customer, the financial institution pays a land transfer tax (LTT) of one-half of 1% of the value of the consideration for the transaction if the property is valued at $55,000; 1% if the value of the property exceeds $55,000 and is up to $250,000; 1.5% if the value of the property exceeds $250,000 and is up to $400,000; and 2% if the value of the property exceeds $400,000. In British Columbia, section 3 of the Property Transfer Tax Act 1996 imposes a similar tax of 1% of the fair market value for properties valued up to $200,000; 2% of the fair market value for properties valued greater than $200,000 and up to $2,000,000; and 3% of the fair market value for properties valued greater than $2,000,000. Differing rates apply in all provinces with land transfer taxes, and some provinces have smaller transfer fee such as Alberta and Saskatchewan. The city of Toronto has its own land transfer tax as well.

Land transfer tax (LTT) generally poses no significant challenges because it is a one-time transaction charge, but the narrative is different when the Murabaha product is the subject of the transaction.

The Murabaha product is usually subject to double land transfer tax (DLTT), because land transfer tax (LTT) is to be paid for each of the transactions, one when the financial institution buys the property and the second when it is transferred to the purchaser. This is the case, unless the financial institution decides to structure its products differently.

In addition, the financial institution could have been subject to capital gains tax on the second sale value when it transfers the property to the customer. This is however negated based on the fact that the borrower (purchaser) is viewed as the owner of the property from the onset, and the bank is viewed as having held the property in the equivalent of a trust for the purchaser, hence the transfer by the bank to the borrower will generally not be viewed as a disposition. The structure of what is perceived to be interest as profit also raises tax concerns. The said profits will be treated as part of the income of the financial institution. The major challenge which is foreseen in this regard is the difficulty in the timing of recognising the profit where the term of the mortgage exceeds three years which is the maximum time available for an income recognition reserve based on future payments.  exceeds three years.

There will be a mismatch regarding the time when the financial institution is meant to include the profit made as part of its taxable income and the time over which the mortgage payments, representing the income stream, are received. Should this be at the time of sale of the business assets or over the payment period. In a conventional loan, of course, the profits will be recognised as ‘interest’ and will be taxable over the term of the loan. Murabaha also attracts Goods and Services Tax (GST) or Harmonised Sales Tax (HST). The arrangement for the mortgage itself does not attract HST, but service such as disbursements, real estate commissions, appraisals, home inspections, and survey fees attract HST. The above taxes apply to Murabaha transactions and some could even apply in a double manner.

Many Tax Obligations Associated with Halal Mortgages Makes the Financial Product Overtaxed and Expensive

The Canadian Tax Law for mortgage is devoid of sentiments and as such; follows its strict intended interpretation of mortgage transactions, which unfortunately gives no special consideration to the religious reasons for structuring Islamic transactions in a manner that is shari’ah-compliant.

The objective is to generate revenue in a manner that does not affect the religious obligations tied to these transactions. Whilst the tax obligations attached to conventional mortgages are similar, halal mortgages seem immersed in a sandwich of taxes and are potentially subject to double or excess taxation.

The weight of these obligations can however be reduced for the customer (mortgagee) because, first-time Muslim homebuyers, as with other first-time homebuyers, may be able to benefit from rebates on land transfer tax, which amount to as much as $4,000 and $4,475 for residents of Ontario and Toronto, respectively as well as provincial HST rebates of up to $24,000 and federal rebate of $6,000.

It must be re-emphasized that the customer, and not the bank, is entitled to the rebate and since the rebate rules are technical and complex the transaction must be structured in a precise way.

The tax -related challenges is why financial institutions such as Manzil has introduced a Special Purpose Vehicle (SPV) as a commercial entity to conduct halal mortgage transactions in a manner which does not attract extra taxes and makes their financial products more financially competitive.  Although it is not assumed that halal mortgages will be full of benefits and no challenges, the expectation is that it solves the financial exclusion faced by Muslims as a result of their religious beliefs, without necessarily overburdening them financially. Unfortunately, this remains the case until some forms of religious exemptions are created to allow first-time Muslim homebuyers enjoy certain benefits or if Islamic financial institutions are able to structure their products to eliminate instances of double taxation.

Pro Tax Tips from our Knowledgeable Canadian Tax Lawyers

  1. Before making commitments to halal mortgage transactions with Islamic financial institutions, ensure that these institutions have not structured the arrangement to strategically shift their tax obligations to you as a customer.
  2. Ensure that all taxes attracted are paid to the CRA, to avoid any form of penalty for non-compliance.
  3. Although fraught with its peculiar issues, Murabaha remains a less complicated halal mortgage product; hence you should always opt for this product.
  4. Before transacting with Islamic financial institutions, engage the services of our knowledgeable Toronto tax lawyers to ensure there are no unexpected tax surprises waiting for you.

Frequently Asked Questions (FAQs) about Halal Mortgages in Canada:

Question: I am a Muslim in Canada seeking to purchase a house through the Murabaha mortgage product, what are the taxes which I am personally liable for?

Answer: In Murabaha mortgage transactions, most of the tax obligations are borne by the financial institution, unless you choose to resell at a later time. However, you are liable to pay Land Transfer Taxes (LTT) in the province where the property is acquired. Tax deductions for payments made for a rental property will however be included if the product purchased is an Ijarah or Musharakah.

Question: I am considering acquiring a property in Ontario using the Murabaha mortgage product, but the tax obligations are numerous. Do I enjoy any specific rebates as a first-time Muslim homebuyer?

Answer: The rebates in the various provinces are only available to individuals, but not to the corporate entities who play a huge role in aiding Muslim Canadians to make an interest-free home purchase.


"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."

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