Investing in Canadian Real Estate
Tax Considerations for Non-resident Purchasers
The United States has historically been seen as a safe haven for investments. But not all investors are enamoured with Donald Trump’s win of the 2016 presidential election, which may give some investors pause as to where to park their money.
If an investor is interested in real estate as an asset class, Canadian real estate may be worth considering. Investors from Hong Kong and mainland China have favoured real estate in British Columbia. Although the recent consensus in the popular media is that Canadian real estate is overvalued, in reality that may only be accurate in certain markets such as Toronto and Vancouver, for example. Canada is a large enough country that there are bound to be many opportunities to buy real estate at a good value, particularly for non-resident buyers who can take advantage of a Canadian dollar that is currently trading at a relatively low value.
This brings us to the tax considerations. Canada’s tax system is similar to most countries, in that non-residents are subject to tax in Canada on the sale of Canadian real estate, under both domestic law and international tax treaties. Similar to the U.S. tax system, the Canadian Income Tax Act imposes a withholding obligation the sale of real estate by a non-resident seller. The purchaser is required to withhold up to 25% of the sale proceeds and remit it to the Canada Revenue Agency (CRA). In addition to the withholding, a clearance certificate known as a “section 116 certificate” must be obtained from the CRA. The compliance process to obtain a section 116 certificate is rather cumbersome, and the CRA’s turnaround time is not quick. It typically takes several months to provide the certificate.
To avoid the onerous section 116 compliance process, prudent non-resident owners of real estate will often use corporate or trust structures. The idea is that if the direct owner of the Canadian real estate is a corporation or trust that is resident in Canada, the seller will be a Canadian taxpayer, and not subject to the section 116 compliance process. This strategy will often simplify eventual sale of the real estate by the non-resident investor.
Other factors must be considered. Some provinces have property transfer tax that applies to the buyer (Ontario, British Columbia). In a controversial move, the Province of British Columbia recently enacted an excess property transfer tax applicable only to non-resident buyers. Alberta has no property transfer tax to residents or non-residents, and is arguably not one of the “overheated” markets, making it attractive to investors from Asia, the United States, and elsewhere.
If there is rental income, tax advice should be sought to ensure that the corporate or trust structure is tax-efficient in both Canada and the non-resident’s country. Although Canada has tax treaties with over 90 countries, double tax may nevertheless arise in the absence of sound structuring advice from a tax lawyer or tax accountant. But with the proper advice, planning and implementing a structure for owning Canadian real estate can be relatively straightforward and can simplify the tax compliance for a non-resident owner.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other tax or business law matter, please contact Robert Worthington or one of the lawyers in the taxgroup at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.