Tax on property income in Canada
Tax Rate on Rental Income
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Nonresident foreigners are liable to tax on their Canadian-sourced income. Married couples are taxed separately.
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.
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 2023
|TAXABLE INCOME, CA$ (US$)||TAX RATE|
|Up to 48,535 (US$35,952)||15%|
|48,535 – 97,069 (US$71,903)||20.50% on band over US$35,952|
|97,069 – 150,473 (US$111,461)||26% on band over US$71,903|
|150,473– 214,368 (US$158,791)||29% on band over US$111,461|
|Over 214,368 (US$158,791)||33% on all income over US$158,791|
|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.
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 GainsOnly 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 ÷ 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.
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
|Source: Frontier Centre for Public Policy 2002|