Americans investing in Canadian real estate

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Canadian real estate may not be cheap[1], but there are several reasons why the True North has become an attractive option for American investors seeking rental income.

Firstly, the favourable exchange rate for U.S. citizens means that the American dollar can stretch a bit further. Secondly, demand for rental properties has increased exponentially in recent years. Canada’s steep real estate prices have meant that even households with an upper income are being edged out of home ownership. For the first time since 1971, the percentage of home ownership in Canada has fallen, and rentals now account for 32% of Canada’s homes[2]. Rent prices are being driven higher, making the decision to become a landlord in Canada a decidedly lucrative one.

A non-resident of Canada who is considering investing must be aware of the various types of tax structures available to them. To take full advantage of the investment opportunity, it is critical to conduct a detailed review of the pros and cons, and seek tax advice from both sides of the border.

Canadian rental investment for non-Canadians
Below are some of the chief methods that Americans can utilize to facilitate investment in the Canadian market:

  1.  Directly as a non-resident individual or corporation (non-resident investor)
  2.  Creating a Canadian corporation to act as the investor
  3.  Creating a Canadian trust to act as the investor (though this is a method too complicated to discuss here in this piece)
  4. Investing as part of a group (partnership or joint venture)

American investors will need to be familiar with the following taxes:

  1. Personal and/or corporate income tax
  2. Withholding tax
  3. Sales tax
  4. Speculation tax
  5. Land transfer tax

Speculation and land transfer tax are both very complicated topics that are above the scope of this blog post. As such, we will focus our discussion mainly on the first three taxes.

Investing in Canada as a non-resident individual or non-resident corporation
Canadian tenants are required to withhold and remit from foreign individuals and/or corporate investors, withholding taxes to the CRA at 25% of the gross rental revenue earned, prior to the 15th of the month after the income was earned. With respect to the rental income, this is the foreign taxpayer’s final obligation for taxes to the CRA. It is worth noting that this is the case where the rental income is passive investment income and not a business of earning rental income.

If the taxpayer wishes, they can elect under section 216 of the Income Tax Act of Canada (“ITA”) to file a tax return for the year the rental income was earned, within 2 years of the calendar year the taxes were withheld. They can claim expenses against the rental revenue they earned and likely receive a refund of the withholding taxes they paid. In addition, if the taxpayer wishes, they can request from CRA to withhold taxes on the net rental income and not the gross income. This request must be made before the beginning of the year the income is received. If this request is approved by CRA, the investor must file a tax return under section 216 of the ITA by June 30th of the following year.

Under the Canada US tax treaty, in most cases, any income taxes paid in Canada can be used to offset US taxes on that income since Americans are taxed on worldwide income. It should be noted that in Canada, depreciation is not mandatory and that you generally cannot create a loss with depreciation. If the rental income is earned on a commercial property or a residential property used for short term rentals, sales taxes may need to be collected on the rental income as well. These taxes may be required on a federal and/or provincial level, and speculation tax may apply.

Investing in Canada via a Canadian corporation
A non-resident individual or corporation can invest in Canada via a Canadian corporation. If either type of investor incorporates a Canadian corporation (“CANCO”), CANCO must file an annual corporate tax return (“T2”) with CRA. The net taxable income of CANCO pays federal and provincial income taxes at a rate of approximately 25% (depending on the province). Any losses can be carried forward 20 years.

Americans must realize that the calculation of net taxable income in Canada may not be the same as net taxable income in the USA. After-tax profits can be paid to the US shareholder via a dividend. Depending on the scenario, withholding taxes paid to the CRA on the dividend will be 15% or 5%.

If the rental income earned on a commercial property or a residential property is used for short term rentals, sales taxes may need to be collected on the rental income as well. These taxes may be required on a federal and/or provincial level. Speculation tax may still apply.

There is another option of investing in an Unlimited Liability Company, known as a ULC, which is beyond the scope of this piece. Furthermore, there are some concerns from a US perspective when investing in a Canadian corporation, which requires the assistance of a US income tax professional.

Investing in Canadian real estate as a non-resident as part of a joint venture
This method is very common when purchasing part of a property. The ITA does not consider a joint venture a legal entity. Hence, it looks through the joint venture participants to determine taxation. Therefore, if a non-resident invests in joint venture as an individual or non-resident corporation, it will follow the treatment stated above.  If they incorporate a CANCO to be a participant in the joint venture, it will follow the treatment as stated above. JV’s have different rules for sales taxes that also extend beyond the scope of this blog post. Speculation tax may still apply.

Investing in or creating a Canadian Partnership
When a non-resident of Canada invests in a partnership registered in Canada, it deems the entire partnership as a non-Canadian partnership for tax purposes, even if the non-resident owns as little as 1%. Non-Canadian partnerships lose many of the tax benefits that Canadian partnerships enjoy while placing the burdens of withholding taxes on each member of the partnership. Therefore, we generally recommend for a non-resident to invest in a Canadian partnership through a Canadian corporation. The Canadian corporation would be taxed on its share of income of the partnership and its only withholding tax obligation would be on paying a potential dividend to its non-resident shareholders. Sales taxes in a partnership are the responsibility of the partnership. Speculation tax may apply.

Seek advice from the experts
Given the intricacies of investing in the Canadian rental market, taking time to connect with a trusted advisor can be the key to unlocking greater income potential and strategic tax insight. The team at Zeifmans has decades of experience advising foreign buyers on the best structures for their unique investment cases. Contact one of our experts today to get started.

[1] Globe and Mail, “Houses in Canada are too Expensive, and it’s not Just the Fault of Foreign Speculators”, https://www.theglobeandmail.com/opinion/editorials/article-houses-in-canada-are-too-expensive-and-its-not-just-the-fault-of/

[2] Globe and Mail, “Canada’s Rental Housing Growth Outstrips Home Ownership”, https://www.theglobeandmail.com/real-estate/the-market/article-demand-for-rental-housing-in-canada-now-outpacing-home-ownership/