Non-residents Investing in Canadian Real Estate Property

Canada Customs and Revenue Agency (CCRA) imposes certain obligations on non-residents of Canada with respect to the reporting of both rental income and the gains realized on the disposition of real property within Canada. In general, a non-resident of Canada who owns Canadian real estate is subject to Canadian withholding tax on any rental income as well as on the gain realized on disposition of Canadian real estate. The following briefly outlines some of these implications and is meant as general guidance only, as each situation will be somewhat different. The following summary is based on the Canadian Income Tax Act in force as of September 2003 and does not necessarily incorporate changes subsequent to that date. We would urge you to seek professional guidance when dealing with any of these matters.

Rental Income

A non-resident owner of Canadian rental property must have an agent in Canada who receives the rental income and remits the appropriate withholding tax. A non-resident who owns Canadian rental property is subject to a 25% withholding tax on the gross rents which should be remitted by the Canadian agent of the owner. However, these withholding tax payments can be reduced or even eliminated if the non-resident owner files a special form (NR6) which enables the withholding tax to be calculated on the estimated net rental income (after normal operating expenses) rather than on the gross rental income. This form is an undertaking by the non-resident owner and the agent to file a Canadian income tax return in respect of the Canadian rental property or properties. This special income tax return is referred to as a Section 216 Return.

Both the NR6 form and the Section 216 income tax return must be filed annually. The NR6 form must be filed before 31 December for the following calendar year.

Gains from Disposals

There is also a compliance requirement on the disposition of Canadian real property owned by a non-resident. The non-resident vendor must inform the Canadian government of the sale within 10 days of the closing or face a penalty. In addition, because the purchaser of the Canadian real estate property is also liable for any Canadian income taxes owed by the non-resident vendor, that purchaser is required to withhold 25%-50% of the gross proceeds of sale and remit them to the Canada Customs and Revenue Agency

(CCRA) on behalf of the non-resident owner. To avoid this withholding, the non-resident owner can file an election requesting a Compliance Certificate enabling the withholding tax to be limited to the tax on the actual gain which will be realized from the disposition. Because of the mechanics of the calculation on the withholding, the non-resident owner should receive a partial refund of the withheld Canadian tax when he or she files a Canadian income tax return for the year in which the disposal occurred. This is certainly true if the gain on the sale of the real estate property is sheltered from income tax in Canada under an international income tax treaty between Canada and the country of residence of the non-resident vendor.

If Canadian rental activity is liable to be significant, it is often carried on through a Canadian corporation which would be subject to Canadian corporate income taxes on its net income. However, if the Canadian corporation is properly structured and financed, the income can be reduced by interest expense on financing as well as management fees which may be subject to lower withholding tax rates under international tax treaties.

Goods and Services Tax (GST)

GST is Canada=s value-added tax at 6% and applies to all sales of goods and services unless specifically exempted. This would include the purchase of a real estate property and the rental income earned by the property, except that used residential property, other than such property intended to be used for short-term rentals of less than 30 days, is exempt from GST. If the property is going to be subject to GST because it is going to be used in a commercial activity (i.e., short-term rentals), then the purchaser should register for GST prior to the acquisition. This way the registered purchaser becomes liable for the GST but he can also claim offsetting input tax credits so that the net remittance for GST on the purchase is Nil; and any GST collected on short-term rents may be offset by any GST paid on taxable purchases to provide the rental accommodation. GST returns must be filed on a timely basis to remit any net tax owing or to claim any net refund.

There are many intricacies in the Excise Tax Act dealing with the GST. A non-resident registrant may be required to post a security deposit, if the amounts of GST that he or she will collect in trust for the Canadian government will be significant. There are also special rebates which may be available to recover a portion of the GST paid for the purchase of a Canadian real estate property.

Our tax and compliance group is familiar with both the rules and regulations relating to non-residents and their investments in Canadian real estate. In particular, Geoffrey Bree, CA, has been involved with our non-resident clients for a number of years. If you require assistance in these areas, please contact Geoffrey Bree by email at gbree@rolfebenson.com or by telephone at 604-684-1101 or fax 604-684-7937.

Rev 10/03