I was on an overseas trip during the end of year holidays and due to the weakening of the Canadian dollar, I'm getting a lot of interest from non-residents planning to invest in Real Estate in Montreal. Personally, I think this is an excellent time to invest if you are pecked to the US dollar. The interest rates are currently at historically low levels and the loonie can't stay at this level indefinitely. However, before you jump in, I would like to share with you the tax implications on Canadian property owner. The below is also useful information for those of you who are planning to become Non-Residents one day!
As anything in life, buying is super easy and there is no difference between a resident and a non-resident of Canada. The differences occur when you sell. Will get to that a bit later.
Residency for tax purposes has nothing to do with Citizenship. You can still be a Canadian Citizen and be a non-resident or a foreigner and still be a resident. Normally anybody who lives in Canada for 6-months plus 1 day is deemed a resident of Canada regardless of citizenship.
Ok, so we established that you are a non-resident and have bought a property in Canada, now what?? Well it depends on the use of the property. Whether you are using it personally or renting it out.
If you acquired the property and use it personally then you have no tax consequences. Simple! No filing, no withholding, no capital gain, Nothing!!
RENTAL OF PROPERTY
If you acquire the property and start renting it out, you would then require an accountant or a property manager who knows how to deal with the obligations of a non-resident.
GENERAL RULE - FORM NR4
So the general rule is that the renter or property manager has the obligation to withhold 25% of the gross rent each month and to remit it to Canada Revenue Agency. Yes that was not a typo. If this is done then the non-resident has no other tax obligation.
ELECTION UNDER SECTION 216
However, since rental income can be offset by legitimate expenses like, municipal taxes, school taxes, condo fees, management fees, interest on mortgage, utility fees, insurance, repairs and maintenance to name a few then the law allows you to elect under section 216 of the Income Tax Act. By electing under this section you must fill an annual return and include the gross rent less the eligible expenses to arrive at the net taxable income, which is taxed on the following rates.
1st $44,701 @ 15%
from $44,701 to $89,401 @ 22%
from 88,9401 to 138,586 @ 26%
anything over 138,586 @29%
Important to remember you have 2 years to elect under this section or otherwise you lose this privilege and must pay at the general rule. By electing to use this section you are paying subsequently much lower taxes, if any.
WITHHOLDING NET RENTAL INCOME - NR6 FORM
Normally, if you elect under section 216 most people also file NR6 form, which asks for permission from Canada Revenue Agency to withhold 25% of the rental income on the net amount instead of the gross amount. In this form you must assign a Canadian Agent who will guarantee you. If you don’t file or remit the amount withheld then the agent will be responsible to pay the taxes owed personally.
So we have explained the ins and outs of holding real estate property as a non-resident. Now we will discuss what happens when you sell your property. It does not matter whether it’s a revenue property or just a personal use property the procedure is the same. Once you have an accepted offer, you can start this process but the latest you can file the T2062A form is 10 days after you notarize. The general principle is the non-resident must pay the capital gain (or appreciation) on the property since acquired.
Ok, that being said how does this work? You will be required to pay Canada Revenue Agency 25% of the net capital gains. At this point you are not entitled to claim any expenses related to the sale of the property like, agency commission, notary fees and welcome taxes on acquisitions.
It normally takes anywhere from one month to three months to process your application and to issue a document called Certificate of Compliance. It does not end here. Since the obligation to ensure the seller pays his fair share of taxes to protect the buyer, the notary will withhold an addition amount. The amount withheld by the notary is normally 25% of the gross proceeds. This amount will be placed at the notary intrust account until he receives a copy of the Certificate of Compliance from Canada Revenue Agency. However, from experience I've noticed that the amount withheld by the notary varies from one notary to another. Some are much more strict then others and hold the entire amount and some hold much less.
Once you receive the Certificate of Compliance then the notary must release all funds withheld in trust.
TP-1097-V FORM - QUEBEC PROPERTIES ONLY
If the property is located in the province of Quebec then you will have to fill the same type of documents to the Quebec Revenue Agency and remit 12% of the net capital gains until you receive the Certificate of Compliance from Quebec.
INCOME TAX RETURN - FINAL STEP
Ok, so you have gotten an offer on you property, notarized the sale, the notary withheld a percentage of the proceeds, you paid the taxes owing on the capital gains, you got your Compliance Certificate and the notary released the funds. Now what?? Well in most cases you would have overpaid since in calculating the taxes owing you were not allowed to include the selling expenses in the calculation.
In-order to be able to claim these expenses you will need to file an Income Tax Return were you claim all your expenses and receive a refund. There!!! You're done! Simple!!
If you are confused by all this and feel a bit discouraged, please don't be. You will be collaborating with an experienced real estate broker who will be able to guide you and refer you to the proper people to ensure you are in compliance with all your obligations and insure a smooth acquisition and disposition. I also provide property management & rentals. Call me, you won't regret ! I am here to help!
Khaled Hajjar Century 21 Real Estate Broker
Email: email@example.com Cell: (514) 998 2006
Five reasons to invest in Montreal:
Prime, safe, secure & stable market
Best time to buy: It is buyers market
Historic low interest rates at around 2%
Canadian dollar at lowest level since 13 years
Underpriced market compare to other Canadian cities