MAIN TAKEAWAYS
- Healthy Real Estate Market: Canada’s real estate market is robust and attractive to foreign investors due to favorable business conditions, political stability, diversity, growth, low-interest rates, and a strong economy.
- Tax Obligations For Real Estate Investors Based on Residency: Non-residents must pay a 25% tax on gross rental income (or net rental income after qualifying) and may be subject to the Non-Resident Speculation Tax (NRST) of 20%. Permanent residents and those staying over six months may qualify for exemptions or rebates. Canadian residents earning rental income from properties located in a foreign country must understand the tax implications, including filing requirements for both Canadian and foreign tax systems, and claiming foreign tax credits or deductions to avoid double taxation.
- Property Types to Purchase: Foreigners can purchase various property types with minimal restrictions, including condos, luxury homes, and commercial properties.
- Tax Filing and Deductions: Non-residents can manage their rental income tax through withholding agents and can elect to file under section 216 for potential deductions on expenses like insurance and maintenance.
- Additional Tax Obligations: Investors must also consider capital gains tax, land transfer tax, and real property tax, with potential rebates for first-time buyers using the property as a primary residence.
Keen to explore Canada’s real estate market? Now might just be the right time. If you’re already familiar with Canada’s real estate market, then you know that it’s one of the healthiest in this region. Even better, foreign ownership of property in Toronto Canada isn’t as complicated as you might imagine, but owning a rental property as a foreigner comes with its own set of tax obligations.
Overseas buyers looking for a stake in this market triple every year because of the favourable business, working, and living environments, defined by low-interest rates, strong regional economy, political stability, and ever-declining unemployment rates, among other factors.
Clearly, you’ve got a dozen reasons not to pass up an opportunity to own property here, but before you dive in head first, you should learn a thing or two about the Canadian tax obligations and more about the intricacies of the market itself.
First off, let’s answer a few critical questions about foreign rental income tax in Canada.
Does Your Residency Status Affect Your Tax Obligations?
The answer is yes. Canada’s tax on foreign rental income bases most of its elements on residency status and the declaration of foreign income. As a non-resident, you are subject to the Part XIII or Part I tax categories, plus the Non-Resident Speculation Tax (NRST), which is now up from 15% to 20% of the purchase price of all homes within the Greater Toronto Area.
It’s not always simple to determine your residency status. For example, a foreign entity would still count as a non-resident. But if you are a non-resident married to a Canadian citizen, you may be exempt from NRST.
You may be Canadian, but if you don’t reside in the country for more than six months, the law identifies you as a non-resident and, therefore, you are subject to the same laws as the foreigners when it comes to tax (except the NRST).
Meanwhile, if your stay in Canada exceeds six months, you qualify for a residency permit, which will exempt you from the levy. And if you become a permanent resident, you qualify for a rebate. Immigrants and those with a student or work visa are also free from NRST.
Also, beware that if you purchase a property to rent out – and you have no intention to become a resident of this country – you may have to pay extra taxes. This is especially true if you own foreign property, as you will need to comply with both Canadian and foreign tax laws, including filing specific forms like Form T1135.
It would be best to speak to a professional to learn more about your residency status and the foreign tax rate in Canada.
What Kind Of Property Can You Buy?
You can buy condos, luxury homes, commercial properties, vineyards, equestrian farms, etc., so basically any type or number of property you want. There are relatively few restrictions. You would benefit a lot from the help of a Toronto property management company when it comes to going about this entire process right.
Tax Requirements On Rental Income For Non-Residents
As a non-resident who owns and rents out their foreign rental property in Canada, there is a 25% tax on the gross rental income of your property. This can be done through a withholding agent, who could be your tenant or property manager. At the end of each month, they’ll remit the tax on rental income to the Canada Revenue Agency and send you what’s left. Additionally, you must report any foreign tax paid to avoid double taxation on the same income.
Type XIII Taxes
Income made from rental properties, together with that from other specific investments, are subjected to this tax category. As a Canadian tax resident, you are required to report income from these sources, including rental income from foreign properties. Your tax obligation could end here, or you can go ahead and file an income tax return with the revenue agency through form T1158 (under section 216 of the Income Tax Act), and have your tax debt reduced by expenses. Some of the deductible expenses include:
- Capital cost allowance
- Insurance
- Advertising
- Management
- Administration and legal fees
- Travel
- Utilities
- Office expenses
- Repair and maintenance
Here’s an example:
You own a property in Toronto whose rental income is $3,000 per month. Your yearly gross rent will be $36,000. Going by the 25% tax you are subjected to, your tax debt will be $9,000 and you’ll be left with $27,000. But if you incurred any of the deductible expenses mentioned above, it’s up to you to choose whether to elect to file your income via the form above.
As for the exact taxes you’ll pay, that will depend on the value of your property and its location. Also important to note is that electing to file under section 216 makes you liable to pay 48% surtax on your federal tax liability, which is calculated based on your net rental income.
Form NR6
This form solves some of the complications presented by the tax reporting method above. Submitting it means you’ve undertaken to file your Canadian tax return as a non-resident earning rental income from real or immovable property or timber royalty. Upon receiving the form, the agency will let your withholding agent file your monthly taxes based on the net income as opposed to the gross income.
Capital Gains
It used to be that only one half of the capital gains you make will be taxed. Recently (June 25, 2024) this changed and capital gains inclusion rate increased to two thirds for corporations and trusts. As for individuals, capital gains also increased from one half to two thirds on the portion of capital gains realized in the year that exceed $250,000.
The figure will be arrived at by deducting capital expenditures, the costs you incurred when you sold and purchased the property, and other costs related to upgrading or modifying the property.
Land Transfer Tax
Property bought in provinces like Toronto will be subjected to land transfer tax, which is the same as that paid by Canadian residents. However, if you are a first-time buyer and you plan to use the acquired property as your primary residence, you may be eligible for a rebate of the same.
Real Property Tax
Local governments usually levy a property tax. Each city/municipality has its own rate, which is based on the location of your property and its assessed value. You can later have this tax deducted from your rental income when submitting your tax report.
Conclusion
Getting that dream home or property in Canada is possible, and with very few restrictions to deal with, the only challenge is doing it right to avoid frustrations and unnecessary expenses. Where taxes are involved, consult with a tax professional or a professional company that helps with such processes to get much-needed help and guidance.
Understanding how to claim foreign tax credit can help reduce your Canadian tax liability and avoid double taxation. Tax withholding on rental income as a non-resident is required to avoid issues with CRA. Also, you might want to buy the absolute best property around and learn as much as you can about the existing state of the real estate market and foreign rental income tax in Canada, and that’s where Buttonwood Property Management comes in. We’re able to help you navigate this complex endeavour and find you the best investment properties in the Greater Toronto Area.
