NON-RESIDENT REAL ESTATE INVESTMENT in CANADA

Non-Resident Ownership  |  Active Business  |  Passive Commercial  |  Real Estate Investment  |  Returning Profits Home

For non-residents investing in Canada, contact our law firm at Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

Canada's real estate market offers non-resident investors significant investment opportunities, while also presenting a set of distinctive and complex tax considerations that need to be appropriately dealt with. Since non-residents are exclusively taxed on income sourced within Canada, all profits derived from Canadian real property, whether through rental income or capital appreciation upon disposition, immediately fall under the scrutiny of the Income Tax Act (Canada). Navigating this tax regime is crucial, as compliance failures or a lack of proactive planning can result in high withholding taxes on gross income, severe cash flow interruptions upon sale, and exposure to significant penalties. Effective tax planning for non-residents must therefore address both the periodic income earned during ownership and the eventual taxable event upon sale, optimizing the application of federal rules and anticipating the increasing burden of provincial surcharges.

For ongoing rental income generated by the property, the default federal position under Part XIII of the Income Tax Act is the Non-Resident Withholding Tax. This mechanism requires the Canadian payer (typically the tenant or property manager) to withhold 25% of the gross rental amount and remit it directly to the Canada Revenue Agency (CRA). This gross-basis taxation, levied without regard for expenses like mortgage interest, property taxes, or maintenance, often results in a prohibitive tax rate on the investor’s actual economic profit. To mitigate this punitive measure, the investor can file Form NR6 to elect under Section 216 of the Income Tax Act, which permits taxation on the net rental income. While this election converts the tax liability to a much lower, net-based amount, it imposes a mandatory annual requirement to file a Canadian income tax return, substituting administrative effort for lower cash flow.

A separate and equally vital tax consideration arises upon the disposition of the investment, as Canadian real property is classified as Taxable Canadian Property. When a non-resident sells Taxable Canadian Property, the Canadian purchaser is legally obligated to withhold a significant portion of the gross sale proceeds (e.g., 25% or 35% of the gross selling price, depending on the property type) and remit it to the CRA. This substantial withholding is essentially a pre-payment against the seller’s final capital gains tax liability and can dramatically restrict the cash available at closing. To reduce this withholding from the gross proceeds to a more manageable rate applied only to the estimated capital gain, the seller must proactively file for a Section 116 Certificate of Compliance with the CRA, a process that must be initiated well in advance of the closing date to avoid major cash flow disruptions.

In addition to federal income tax rules, non-residents must contend with specific layers of provincial and municipal taxes that significantly affect the initial cost of acquisition, depending on the property’s location. Provinces like Ontario and British Columbia have implemented substantial non-resident speculation or foreign buyer taxes, imposing massive surcharges on the initial purchase price of residential property. For example, Ontario currently imposes a Non-Resident Speculation Tax of 25% province-wide. Similarly, British Columbia levies a Foreign Buyer Tax component of its Property Transfer Tax, alongside an annual Speculation and Vacancy Tax in designated areas. Conversely, provinces like Alberta do not currently impose such non-resident purchase surcharges, making real estate acquisition in these regions potentially less complex and costly at the outset.

Given the layering of taxes, Part XIII Non-Resident Withholding Tax on gross rent, the complexities of the Section 116 withholding on sale proceeds, and the severe provincial speculation taxes, proactive and informed tax planning is not merely advisable but mandatory. The optimal ownership structure (individual, trust, or corporation), the decision to make the Section 216 election for rental activities, and the timely application for the Section 116 certificate are all planning points that must be addressed to minimize the investor's tax burden and maximize compliance. Furthermore, newer federal requirements, such as the annual filing obligations under the Underused Housing Tax, underscore the continuous administrative demands placed upon non-resident property owners in Canada.

For knowledgeable and experienced tax, investment and corporate law representation for non-residents looking to invest in Canada, whether through active business enterprises, passive income investments or real estate investments, we welcome you to contact our law firm for strategic legal advice to optimize your commercial interests in Canada at Chris@NeufeldLegal.com or call 403-400-4092 / 905-616-8864.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as legal advice or tax advice. You should not rely upon, or take or fail to take any action, based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. The law firm of Neufeld Legal PC would be pleased to discuss legal matters referenced in this website upon their retention in accordance with applicable requirements pertaining to client retention by this law firm. Thank you.