The new year brought more changes to the residential housing tax landscape, as the federal government introduced measures to mitigate the negative impacts of speculative investing, low supply, and tax avoidance. This article summarizes the new federal measures and provides a refresher on some existing federal and provincial measures applicable to residential real estate owners.
New: Two-year prohibition on non-Canadians purchasing residential property
Effective January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act) came into force. It prohibits non-Canadians1 from purchasing, directly or indirectly, a residential property2 located in a census agglomeration or census metropolitan area in Canada for a period of two years. The Act may unintentionally catch certain commercial transactions with look-through rules,3 and it may catch land that does not have a “habitable dwelling” if the land is zoned for residential or mixed use.
Exceptions include the following:
- If the purchase and sale agreement was made prior to January 1, 2023;
- If the purchase is a transfer from a trust that was created before January 1, 2023;
- If non-Canadian individuals jointly purchase residential property after January 1, 2023, with their spouse or common-law partner and their spouse or common-law partner is a Canadian citizen, a permanent resident, a temporary resident or refugee (certain categories only), or a person registered as an Indian under the Indian Act; and
- If an individual acquires an interest or right from a death, divorce, or separation, or as a gift.
Violations of the Act can result in a fine of up to $10,000 for each non-Canadian and other person who knowingly assists, directly or indirectly, in purchasing the property. Additionally, the government may ask for a court-ordered sale.
New: Residential property flipping rule
Effective January 1, 2023, a new tax rule applies to gains from flipping Canadian residential property (including rental property and rights, such as pre-construction contracts).
Historically the onus has been on the Canada Revenue Agency (CRA) to identify and audit taxpayers and factually determine whether a real estate sale results in a capital gain or business income. Generally, the CRA and the courts have held that the gain is business income if the property was sold within two years, unless the seller’s circumstances changed after the purchase.
The “anti-flipping” rule in the new subsection 12(12) of the Income Tax Act is intended to be a bright-line test that deems a taxpayer to be carrying on business with respect to a flipped property, and the property to be business inventory, if:
- The property is sold for a profit and owned for less than 365 consecutive days (or the right to buy is assigned within 365 days); and
- None of the available exceptions apply.4
Effectively, this rule encourages tax preparers to report any profit on the sale of residential property held for less than 365 days as business income5 and not as a capital gain to reduce the risk of a section 163.2 third-party penalty. Additionally, it prevents the taxpayer from claiming the principal residence exemption, and it prevents any loss on the sale from being categorized as a business loss.
The new rule prompts a number of questions. For example, will taxpayers and auditors be encouraged to conclude that owning a property for more than 365 days constitutes a capital gain even if the purchase was a speculative investment? When does the clock start for 365 days? What about new builds or pre-construction contracts?6 The bottom line is that we still need to rely on case law and the CRA’s assessment policy for guidance on interpreting this new rule.
New: Bare trust reporting obligations under the enhanced trust reporting rules
Effective for tax years ending after December 30, 2023, trustee(s) of a bare trust (a trust acting as an agent for its beneficiaries), will also have to file a T3 Trust Income Tax and Information Return under the enhanced trust reporting rules.
The new rules require most trusts to disclose extensive details to the CRA such as the full name, address, date of birth, jurisdiction of residence, and tax identification number of all trustees, beneficiaries, settlors, and protectors. Non-compliance will result in penalties of $25 per day, up to a maximum of $2,500. Gross negligence or intentional non-compliance penalties start at $2,500 and could amount to 5% of the maximum value of trust property held during the taxation year.
Existing: Tax obligations for non-residents owning Canadian real estate
Renting Canadian real estate
Persons paying rent to the credit of a non-resident of Canada are required to:
- Withhold and remit 25% from the gross rent payment to the CRA on or before the 15th day of the month following the month the rental income is paid or credited to the non-resident; and
- File an NR47 return by March 31 for rent paid and withholding tax for the previous calendar year.
The withholding is a final tax. However, the non-resident may elect to file a Canadian section 216 tax return and pay Canadian tax on the net profit from the rental operation. Alternatively, if the non-resident landlord appoints a Canadian agent and files an NR6 form8 with the CRA before the start of a calendar year:
- The person paying rent is not required to withhold and remit 25% tax to the CRA;
- The Canadian agent must remit 25% of the expected net rental income from the property to the CRA; and
- The non-resident must file a Canadian tax return within six months of the end of the calendar year to report the actual net rental income from the property.
Selling Canadian real estate
A person who purchases Canadian real estate from a non-resident of Canada is required to withhold between 25% to 50% tax from the payment of the purchase price, and remit it to the CRA within 30 days of the end of the month in which the property was acquired.
However, the non-resident vendor can apply to the CRA for a certificate of compliance to calculate the withholding tax on the gain (and recapture) rather than on gross proceeds. If the CRA accepts the application and the vendor provides the purchaser with a copy of the certificate of compliance before closing, the withholding tax that the purchaser is required to withhold and remit is reduced.
A non-resident who disposes of Canadian real estate but did not apply for a certificate of compliance must notify the CRA within 10 days of the disposition. Failure to do so is an offence under the Income Tax Act.
The non-resident vendor may file a Canadian income tax return to report the disposition to recover some of the withholding taxes paid as an instalment.
Existing: Additional BC property transfer tax
In addition to the regular property transfer tax (PTT) that purchasers must pay on title transfers of BC real estate,9 there is an additional 20% PTT that a foreign national, foreign corporation, or taxable trustee10 must pay when purchasing residential real estate within specified areas of BC,11 based on their proportionate share of the residential property’s fair market value.
Existing: BC Speculation and Vacancy Tax
The BC Speculation and Vacancy Tax was implemented in 2018 to encourage more residential rental supply and discourage housing speculation. It applies to residential properties situated in designated taxable regions, and as of January 1, 2023, its scope has been expanded to include the municipalities of North Cowichan, Duncan, Ladysmith, Lake Cowichan, Lions Bay, and Squamish.12
At December 31, all owners on title (including each spouse or common-law partner) must file a declaration, which is due March 31 of the following year. Any 2022 tax is due July 2, 2023. It is levied at a rate of:
- 0.5% for Canadian citizens and permanent residents, excluding members of a “satellite family” (a satellite family is generally one in which more than half of the family income is neither reported nor taxed in Canada); and
- 2.0% for a foreign owner or member of a satellite family.
Failure to pay the BC Speculation and Vacancy Tax may result in a 10% penalty of the unpaid tax. Failure to file a declaration may result in a penalty of up to $2,500. A false declaration and an attempt to evade the tax may result in fines of up to $100,000 and/or a 10-year minimum prison term.
There are some common exemptions for a particular year, including if:
- The property is the owner’s principal residence;
- The property is rented long term (a minimum of six months) in increments of at least 30 consecutive days. Further, if the renter is a non-arm’s length tenant of a foreign owner,13 the tenant must be a Canadian citizen or permanent resident and their reported BC income for that particular year must be at least three times the annual fair market value rent for the entire property;
- The property was acquired in that year14; and
- The property is under development without undue delay.
For a complete list of exemptions, consult the BC government website.
A lot to consider
Owners of residential real estate in BC may also need to consider the federal Underused Housing Tax,15 which was introduced in 2022, and the Vancouver Empty Homes Tax, which was introduced in 2017. Collectively, the various federal, provincial, and municipal measures create a complex network of rules for property owners and their tax preparers. We advise everyone to tread carefully.
This article was originally published in the March/April 2023 issue of CPABC in Focus.
Janice Hutchison, CPA, CGA, is a senior tax manager with DMCL’s Canadian tax group in Vancouver, where she advises private enterprises and their shareholders on a broad range of Canadian tax matters.
Aurash Yazdgerdian, CPA, is a tax manager with DMCL, where he specializes in Canadian personal and corporate tax compliance and planning.
1 This encompasses individuals, corporations, and other entities.
2 A residential property may be a detached house, a duplex, a townhome, a condominium, etc.
3 For example, not exempted are Canadian corporations, partnerships, and trusts (including REITs) with a very low threshold of 3% or more direct/indirect equity or votes held by non-Canadians. This catches more than entities controlled by a foreign person/corporation.
4 There are exceptions for property held less than 365 days where significant household changes are involved, such as a birth, the care of an elderly parent, a death, a marriage breakdown, a serious illness, or a job transfer.
5 This may allow interest expense, property tax, and condo fees to be claimed.
6 For pre-construction contracts, the Department of Finance Canada announced on November 4, 2022, that the 12-month clock would reset when the taxpayer secures ownership.
7 NR4: Non-Resident Tax Withholding, Remitting, and Reporting.
8 NR6: Undertaking to File an Income Tax Return by a Non-Resident Receiving Rent from Real or Immovable Property or Receiving a Timber Royalty.
9 The regular PTT is 1% on the first $200,000, 2% on the amount between $200,000 and $2,000,000, 3% on the amount between $2,000,000 and $3,000,000, and 5% on the remaining fair market value
10 A taxable trustee could be a foreign national or foreign corporation holding title in trust for beneficiaries; or a Canadian citizen or permanent resident, if a beneficiary of the trust is a foreign national or foreign corporation and that beneficiary holds a beneficial interest in the trust’s residential property.
13 An owner (i) who is not a Canadian citizen or permanent resident or (ii) whose global income (combined with that of their spouse or common-law partner) for the preceding year exceeds their income (combined with that of their spouse or common-law partner) reported to the CRA.
14 If PTT was paid or the property was exempt from PTT.