Whistler Real Estate for Non-Residents
Non-Residents Investing in and
Disposing of Canadian Rental Real Estate
Before the non-resident investor acquires Canadian rental real estate consideration should be given to the best manner in which such real estate should be held. For example - held personally by non-resident individuals, by a Canadian corporation, by a foreign corporation, by a trust or other family members.
Often Canadian income tax considerations are not the only factors that should be considered by the non-resident investor. Other important issues would include tax laws in the country of residence, liability considerations, a desire for anonymity and the requirements of lenders.
Where Canadian tax will be payable under Part XIII of the Canadian Income Tax Act ("The Act") on the gross rental income derived from the property (in this scenario the expenses to generate the gross rents are ignored), the form of entity whether an individual, corporation or trust will not matter in terms of the tax rate (generally 25%). However, the form of entity may matter in connection with the Canadian taxation of any capital gain that may result from the disposition of the property.
A non-resident who is otherwise subject to tax under Part XIII in respect of gross rental income from real property in Canada may elect to be taxed, instead, on net rental income (in which expenses incurred to generate gross rents are deducted from the gross rents) under Part I of The Act at rates similar to those that apply to Canadian residents. For most non-residents, it is beneficial to elect to be taxed under Part I of The Act rather than under Part XIII.
Where net rental income is low. In cases where the amount of net rental income received is low, consideration should be given to personal ownership by the non-resident and one or more members of the non-resident's family.
Income splitting. Non-resident individuals may achieve income splitting and reduced effective tax rates if the interest in Canadian rental real estate is divided amongst various family members of the non-resident individual. This will allow the relatively low tax rate applicable to the first $35,716.00 of taxable income to be multiplied amongst family members.
Spousal support. In cases where the non-resident individual is making spousal support payments that would be deductible if the non-resident were resident of Canada, the spousal support payments may be deducted in computing income from the rental real estate property if the property is owned personally by the non-resident investor.
Losses. If losses will be generated from the rental of the property, a non-resident will not be able to carry forward those losses, unless the rental activities constitute a business carried on in Canada. On the other hand, a Canadian resident corporation or trust will be allowed to carry forward those losses for twenty years.
Taxation on death. One disadvantage to personal ownership of Canadian real estate by a non-resident individual is potential exposure to taxation on accrued capital gains and recaptured capital cost allowance (depreciation) on the death of the non-resident. If this is a concern, a foreign corporation or trust may be the preferred choice to hold the property. However, if a trust is used (whether or not it is resident in Canada) is used, the possible application of the "21-year deemed disposition rules" would have to be considered.
Capital taxes. Where corporate ownership is considered, the potential cost of the British Columbia Corporate Capital Tax would have to be considered.
File Part I Returns on Time. Non-residents who earn Canadian real estate rental income should remember that in order to pay Canadian tax on a net income basis a Canadian tax return must be filed within the required time limit. In cases where form NR6 is filed, the return must be filed within six months after the year; otherwise the non-resident will have two years from the end of that year to file a return. This is no provision in the Canadian Income Tax Act too late file a return. If the return is not filed within the required time limit, Part XIII tax will be payable on the gross rents.
Debt Financing. Because tax rates are generally higher in Canada than in most foreign tax jurisdictions it is generally useful to consider whether the overall amount of tax could be reduced by having the Canadian rental real estate property capitalized with interest-bearing debt as opposed to equity.
Foreign Lenders. As of January 1, 2008, withholding tax is no longer payable on most interest payments made by Canadian borrowers to arm’s-length lenders, including lenders that reside in the United States. Amendments to Canada’sIncome Tax Act have opened the door to the Canadian borrower market for U.S. lenders by reducing the cost of borrowing and allowing for a more efficient structuring of cross-border investments.
Dispositions of Rental Real Estate Property by Non-Residents of Canada. Non-residents may be subject to Canadian tax on capital gains from the disposition of "Taxable Canadian Property". The portion subject to Canadian tax is 50% of the capital gain. Real property situated in Canada is generally Taxable Canadian Property. The rules regarding Taxable Canadian Property are extensive and professional advice should be sought to determine the status of the property to be disposed of.
Treaty Protection. To the extent that non-resident has disposed of Taxable Canadian Property and as a result is subject to tax under the Canadian Income Tax Act in respect of the gain, the non-resident may rely on an income tax treaty to exempt the gain in certain circumstances. No tax treaty, however, exempts gains realized by non-resident from the disposition of real property situated in Canada. Many, if not most, of Canada's treaties exempt gains of shares, partnership interests and trust interests; however, Canada generally retains the right to tax such gains if more than 50% of the value of the shares or interests sold is derived from real property situated in Canada.
United States Treaty. As a result of the fourth Protocol to the United States Treaty which was implemented at the end of 1997, a United States resident disposing of an interest in a partnership or non-resident trust or real property directly which constitutes Taxable Canadian Property continues to be taxable in Canada. However, Canada can only tax gains derived by a resident of the United States on the disposition of the shares of a resident Canadian corporation which derives more than 50% of its value from Canadian real estate. The disposition of shares of a corporation resident in the United States, which holds Canadian real-estate, would appear to be treaty protected from taxation in Canada.
GST Issues. If the property is to be used in a commercial activity the prospective owner should register before the purchase to defer the payment of the GST on the property.
The preceding planning points should not be considered to be exhaustive of all circumstances and it highly recommended that the reader retain the services of a Chartered Accountant before implementing any of the above-noted concepts.