How to Shelter Taxes in Canada for Foreign Investors

How to Shelter Taxes in Canada for Foreign Investors

It’s been a long history that Chinese families like to send their kids away for school for different reasons.

My dad grew up in a communist country. Even in a communist system, the families were ranked. The higher the ranking, the more resources you get from the government. Being ranked at the bottom of the system, our entire family was constantly looked down by other people. He suffered enough and eventually left and moved to Hong Kong, but he didn’t want us to suffer the same thing one day.

My dad, being a contractor who had very limited education, faced the challenge of bidding in large commercial contracting work in English everyday. He didn’t want us to suffer the same thing as he did. So he sent us over to learn the language.

Like us, many Chinese families sent their kids overseas to get higher education and possibly stay to get the local citizenship. These parents, through their kids, learn that it’s relatively inexpensive to purchase a place in Canada. They send money over and the kids buy houses for themselves.

Because their kids are local tax residents in Canada, more often than not, they are able to shelter all the taxes in their principal homes. Homes in Canada are beautiful and if you are looking for a home in Canada then you should check out Okanagan townhomes, these homes are amazing and if there was ever a location in Canada to live in, Okanagan would be it. Another very popular living location is Calgary and you can visit to learn more about it. No matter where you choose to buy a property, Canada, in general, is beautiful!

Some other foreign investors don’t really have any ties here locally in Canada. All they want is to find a country that has strong economic fundamentals to invest. They believe in the Canadian system and economy. They need a place to invest their money, why not Canada?

What are the tax implications for these investors if they buy a place locally?

Without proper election, a foreign investor (we call them “Non-resident” as the tax term) has to remit to the government 25% on their gross rental income on or before the 15th day of the month following the month the rental income is paid to you. Each country has its own tax policies, so if you’re going to be an overseas property investor, it helps to learn how the local taxes will affect your investment. Depending on the country you are looking to invest in, there are companies that can help to give tips like these on your investment.

Say a foreign investor receives $2,000 rental income for November, his property manager or the tenant has the obligation to withhold 25% of $2,000, i.e. $500, to the government by December 15.

If this does not happen, the CRA will charge compound interest daily on the amount not withheld and remitted. They can also charge a penalty on it.

This doesn’t sound very fair, does it? Charging taxes on the gross rental income and not able to claim any expenses against it doesn’t seem fair at all.

Fortunately, the Income Tax Act does allow the foreign investors to file an election so as to allow him to remit taxes only on the net income from the property.

Continue with the example above, the foreign investor may incur expenses of insurance, property management, property taxes, etc. for a total of $1,600. He is only required to remit 25% withholding taxes on $400 ($2,000 – $600), i.e. $100 on a monthly basis.

He is also eligible to claim capital cost allowance to defer the income. Say capital cost allowance is about $300 a month, he can then further reduce the withholding tax to $25 (($2,000 – $400 – $300) x 25%).

Based on what we discussed before, at the end of the year, he remitted $300 of tax ($25 x 12 months) to CRA on this property. Let’s say this investor incurred an unexpected repair for $3,000 at the end of the year. What happened to his taxes paid?

The foreign investor is required to file a tax return (called Section 216 tax return). He is then eligible to claim any taxes back if there is any refund.

Note that if the foreign investor does not file the return on time, the withholding taxes are reverted to the original calculation (25% on gross rent). Interest and penalty will be charged by CRA.

You may wonder what would happen if he incurred a loss on the property.

Unlike us being Canadian tax residents, we are allowed to carry back and forward the losses, foreigners are not allowed to carry back and forward any losses.

When the foreign investor sells the property, he is required to obtain a certificate of compliance from CRA. This certificate of compliance is only issued when the tax withholding is paid to CRA in advance.

With the application to obtain the certificate of compliance, the foreign investor is only required to pay 25% of the net taxable gain to the government.

Without the certificate of compliance, the purchaser of the property is required to withhold 25% on gross proceeds instead.

Yes, there are a few rules a foreign investor has to comply with to minimize the tax paid. If you have a foreign investor as your joint venture partner, be aware and make sure you are complying with all these tax withholding requirements.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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