The Canadian real estate market, both residential and commercial, has known some good years since the beginning of the new millennium so that the Canadian real estate remains, even nowadays, a class of privileged market for national and international investors.
Indeed and in spite of a market of unequal intensity from one side to the other of the country and characterized by a certain decline of the indicators of the sector, the Canadian real estate market remains relatively robust, in particular because of the weakness of mortgage rates and a relatively strong economic growth.
However, whether it is to acquire a building for personal purposes, real estate speculation, to generate income from rents in the long term or to simply operate a business, there are many tax implications that may negatively affect performance of such an investment, in particular for the one who does not reside in Canada.
In this regard, a taxation plan adapted to the circumstances and the needs of the investor participated without a doubt to an adequate management of risks inherent in such an investment.
The objective pursued by the present is of course, not the one to draw up an exhaustive list of all the possible tax implications nor the one to deal with all types of taxation plan feasible to avoid them, but to briefly state some of the latter in order to illustrate the importance of a taxation plan upstream of the real estate investment projected.
- Main Structures of Basic Investment
- The Detention of a Building by an Individual Non-Resident
- Commercial Building
Although nothing prevents an individual non-resident of Canada to hold directly a commercial building, the gross rents collected will be subject to a withholding tax of 25% at the federal.[i].
This individual may, however, make the choice to be rather taxed on the net rental income at the federal[ii]. In Quebec, the investor would not be subject to any tax on income since not living in Quebec at the end of the year.
On the practical level, however, the detention of a commercial building directly by an individual is generally not recommended due to the risks associated with civil liability.
- Residential Building
Contrary to a Canadian resident who owns a residential building as their main residence, the individual non-resident of Canada will not qualify for the exemption on the capital gain generated during the resale of a main residence.
- The detention of Property by a Legal Person
- Legal Person Residing in Canada
The rental income generated by a building owned by a legal person residing in Canada but controlled by non-residents will be subject to a tax on income both at the federal and provincial level, as well as to the tax on the capital of Quebec, when appropriate.
With respect to the repatriation of profits in the form of dividends to non-resident shareholders, it will generally provide with a deduction equal to 25% of the declared dividend and at least that the country of residence of the stockholders is signatory with Canada, of a tax convention having generally for effect to bring this restraint to 5 %, 10 % or 15 % depending on the circumstances, which is particularly the case for the majority of the countries of the European area.
- Legal Person Not Resident in Canada
Gross rents collected by a legal person non-resident of Canada are subject to a withholding tax of 25 %. In addition, although the latter is not a resident of Quebec, it will be deemed to be a property for tax purposes if it is the owner of a building used primarily for the purpose of gaining or producing income from rents. It will be therefore subject to income tax as well as capital tax.
- The Detention of a Building by a Canadian “Partnership”
It is also possible to carry out a real estate investment through the mean of a Canadian society of people (“partnership”), which does not constitute a separate legal entity but rather a grouping of people with a common goal, to operate a commercial activity for profit purposes.
For tax purposes, this partnership will be deemed to be a separate person only for the purposes of calculating the income. Once determined, the latter will be apportioned among the partners of the partnership which will include it in the calculation of their own income.
The fiscal impacts associated with this vehicle will therefore be determined according to the legal status of each of the associated which can be as much of the natural or legal persons. To the extent that only Canadian residents can be associated within the partnership so that the latter may maintain its status as a Canadian partnership, a more complex structure might need to be put in place.
- The Financing of a Building by a Non-Resident
According to the relevant measures currently in force, a payment of interest made by a Canadian resident in favour of a non-resident is no longer, except exception, subject to a withholding tax.
The federal act contains however to the thin capitalization rules which are applicable to legal Canadian persons borrowing from foreign corporations with which they have a relationship of dependency. In general, these rules limit the ratio of capitalization borrowed versus the own capital of the legal with person to a ratio of 2 to 1. Any excess of this ratio has the effect of limiting the deductibility of interest which are paid by the legal Canadian person to the foreign corporation being linked to. On the practical level, these rules require therefore this foreign corporation to finance at least a third of the Canadian legal person with whom it is linked by means of a financing in the form of equity capital rather than by means of a loan.