A non-resident earning rental income has a choice of how the income is taxed:

(a) Pay 25% on the gross rents including recoverable expenses received OR

(b) Make an annual election on a prescribed form that must be filed to Canada Revenue Agency (CRA) by January 1st every year to pay tax on the net rental income by filing a Canadian income tax return for the net rental income only. If the tax return is filed late or not at all, the non-resident will be taxed 25% of the gross rents plus interest and penalty.

If the election is made by a non-resident individual, the individual will be taxed at graduated tax rates normally applicable to Canadian residents starting at about 23% up to $42,707 CDN and reaching about 43%, on the net rental income portion exceeding about $132,406 CDN. If the election is made by a non-resident corporation, the combined federal and provincial corporate income tax rate is approximately 29.5% to 35.5% on the net rental income, depending on the province.

Sale of Real Estate by a Non-resident

The tax treatment of any gains on the sale of Canadian real estate depends on whether the gain is treated as a capital gain or business income. Generally, if the non-resident is actively buying and selling real estate as inventory, then the operation is likely to be considered a business and will be taxed on the full amount of the gain.

If there is a capital gain, the normal Canadian tax rates will be applied to 50% of the gain for sales after October 17, 2000. However, a non-resident is required to pay an estimate of the tax before the sale, an amount of 25% of the gain. Upon payment, the CRA will issue a Tax Clearance Certificate to the vendor. If a purchaser does not receive this Certificate from the vendor, the purchaser, through their lawyer, is required to withhold tax and remit as tax to CRA 33.3% or more of the gross purchase price from the vendor!

Before April 30th following the calendar year of the sale, the vendor should submit a Canadian income tax return reporting the gain minus the actual selling expenses (sales commission, lawyer's fee, etc..) as this will result in a tax refund of part of the taxes that were paid on closing, back to the vendor.

These are specialized procedures that require experienced tax professionals to ensure the Tax Clearance Certificates are approved quickly and to ensure the lowest amount of tax is paid.

Goods and Services/Harmonized Sales Tax (GST/HST)

5% G.S.T. is payable on the purchase price of newly constructed or substantially renovated residential homes. Substantially renovated is defined in the legislation as the removal or replacement of most of the house construction components except for the foundation, external walls, interior supporting walls, floor, roof and staircase.

Other expenses when puchasing real estate in Canada;

Inspection

Insurance

Bank appraisals

Legal Fees for closing

Property Transfer Tax (BC) 1% on the 1st $200,000 and 2% on balance.  Each province has a different structure.

GST (if applicable - new construction)

One difference when purchasing in Canada as opposed to the USA is that our deposits sit in a "Trust account" as opposed to an "Escrow account".

The information presented here is general in nature and is not intended to replace professional advice where facts and circumstances may be different. No action should be taken without consulting your Chartered Accountant. Enquiries related to this article, other tax or business matters and career opportunities should be made