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Oct 02, 2013

Taxes are generally high


INDIVIDUAL TAXATION

Nonresident foreigners are liable to tax on their Canadian-sourced income. Married couples are taxed separately.

INCOME TAX

Income is generally taxed at the federal level and at the provincial level. In all provinces, except Quebec, the Canadian Government collects taxes on behalf of the provincial or territorial government. The provincial rules for computing income are generally (but not always) consistent with the federal rules. The tax bands and rates are regularly adjusted annually.

RENTAL INCOME

25% Withholding Tax
Nonresidents earning income from the rental of Canadian real estate are generally subject to 25% tax on gross income, withheld by the tenant or the property manager. The payment of the 25% withholding tax is generally considered to be the non-resident’s final tax obligation to Canada.

Section 216 Election
However, nonresidents earning rental income can elect under section 216 of the Income Tax Act (Canada) to file an income tax return. By so electing, the nonresident is taxed on his net rental income at the federal tax rates.

FEDERAL INCOME TAX 2013

TAXABLE INCOME, CA$ (US$) TAX RATE
Up to 43,561 (US$42,129) 15%
43,561 – 87,123 (US$84,258) 22% on band over US$42,129
87,123 – 135,054 (US$130,613) 26% on band over US$84,258
Over 135,054 (US$130,613) 29% on all income over US$130,613
Source: Global Property Guide

FEDERAL INCOME TAX 2012

TAXABLE INCOME, CA$ (US$) TAX RATE
Up to 42,707 (US$41,303) 15%
42,707 – 85,414 (US$82,605) 22% on band over US$41,303
85,414 – 132,992 (US$128,619) 26% on band over US$85,306
Over 132,992 (US$128,619) 29% on all income over US$128,619
Source: Global Property Guide

Nonresidents electing under section 216 are also liable to pay 48% surtax on their federal tax liability. They are also not liable to pay provincial taxes.

Canada luxury residential apartments and houses

Deductible expenses include Capital Cost Allowance, advertising, insurance, interest, maintenance and repair costs, management, administration and legal fees, office expenses, property taxes, travel, utilities and others.

The depreciation allowance is called Capital Cost Allowance (CCA). Only 50% of the cost of the property is depreciable for the year of acquisition. The maximum CCA that can be taken is the amount that reduces the net income to nil.

Rental buildings may belong to different classes depending on the structure and the acquisition date. Most buildings acquired after 1987 belong to class 1 and are depreciated at 4%. Furniture and equipment are depreciated at 20%.

CAPITAL GAINS
Only half of the final capital gains are taxed as part of income. Capital gains are computed by deducting the costs incurred in selling and purchasing the property, capital expenditures, and such costs as additions and improvements in the property.

Proceed of Disposition
Less: Adjusted Cost basis
Less: Outlays and Expenses on Disposition
= Capital Gains
Capital Gains ÷ 2 = Taxable capital gains

Federal Withholding Tax

A clearance certificate procedure requires a purchaser to withhold the proceeds paid to a nonresident seller on the sale of Canadian properties. The amount withheld is generally 25% (50% on certain properties) of the net gain on disposition if proper notice is given to the authorities and a clearance certificate is provided to the purchaser.

If the clearance certificate is not obtained, the amount withheld increases to 25% (50% on certain properties) of the gross proceeds. Amount withheld can be credited against the nonresident sellers’ tax liability regarding the property.

In addition to the federal withholding tax, Quebec has a similar withholding tax on sales of taxable Quebec property. The general withholding tax is 12% but the tax rate may be higher for certain types of properties.

PROPERTY TAX


Real Property Tax

Property taxes are levied by local governments. The rates depend on the city or municipality where the property is located, and the assessed value of the property. Property taxes can be deducted from rental income when paying taxes.

For comparison, we show the effective residential tax rate as percent of market value for a detached bungalow and a standard condo apartment for different cities.

EFFECTIVE PROPERTY TAX RATES
(as % of Market Value)

MUNICIPALITY
DETACHED BUNGALOW
STANDARD CONDO APARTMENT
Calgary
0.84
0.88
Edmonton
1.24
0.94
Halifax
1.18
1.18
Montreal
1.78
1.39
Ottawa
1.34
1.08
Regina
1.99
1.98
Saskatoon
1.57
1.83
St. Catherines
1.93
1.17
St. John
1.29
1.20
Toronto
1.15
1.05
Vancouver
0.72
0.57
Victoria
0.61
0.61
Winnipeg
1.96
2.56
Source: Frontier Centre for Public Policy 2002





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