CANADA – QUÉBEC Law and Practice Contributed by: Eleonora Eusepi, Sabrina Guillot, Janie Chaloux and Nicolas Gosselin, BCF Business Law LLP
8. Tax 8.1 VAT and Sales Tax
the owner manages the property, the more likely the income will be treated as business income. Non‑res - idents earning business income are taxed on net income at corporate‑level rates (generally 23%–31%, depending on the province) and may also be subject to a 25% branch tax, which can be reduced under applicable treaties, including to 5% under the Cana - da–US Tax Treaty. Payments such as rent, dividends, interest, and royal - ties to non‑residents are generally subject to a 25% withholding tax, often reduced by treaty. Non‑resi - dents earning passive rental income may elect under Section 216 of the Income Tax Act to file a return and be taxed on net rather than gross income. Non‑residents are also taxed on gains from dispos - ing of “Taxable Canadian Property,” which includes direct real estate interests and certain entity interests deriving over 50% of their value from Canadian real property. Purchasers may need to withhold 25–50% unless a clearance certificate is obtained, and sellers must notify authorities within ten days of disposition. For VAT on rent, please see 6.7 Payment of VAT . 8.5 Tax Benefits When computing net rental income (whether by a Canadian resident, a non-resident carrying on busi - ness in Canada, or a non-resident filing under Section 216 of the Income Tax Act), deductions are gener - ally allowed for: (i) operating expenses; (ii) reasonable financing costs; and (iii) tax depreciation (capital cost allowance). Depreciation may be claimed on build - ings and other depreciable assets used to earn rental income at declining-balance rates typically ranging from 4% to 10%. The claim is discretionary and can - not generally create or increase a rental loss. In the year of acquisition, only half of the standard deprecia - tion rate is permitted.
Canada imposes value-added taxes through the Goods and Services Tax (GST), Harmonized Sales Tax (HST), Provincial Sales Taxes (PST) and Québec Sales Tax (QST). These taxes vary by province, gen - erally ranging from 5% to 15%, depending on where the transaction occurs. GST/HST/PST/QST typically apply to transfers of: (i) commercial real property; and (ii) new residential real property. The seller generally has the obligation to collect the applicable tax from the buyer, unless the buyer is registered for GST/HST/ PST/QST and acquires the property in the course of commercial activities, in which case self-assessment may apply. Transfers of used residential properties are usually exempt. Additionally, sales of real property as part of a broader business sale may benefit from an exemption from GST/HST/PST/QST. 8.2 Mitigation of Tax Liability Where imposed, land transfer tax usually applies to direct transfers of real property, not to transfers of shares of a corporation or, except in certain provinces such as Ontario and Québec, interests in partnerships holding real estate. In some provinces, land transfer tax may also apply to the transfer of long-term lease - hold interests, depending on the lease duration and its renewal options (ie, exceeding 40 years). For addi - tional context, see also the discussion of the federal Underused Housing Tax in 1.3 Proposals for Reform . 8.3 Municipal Taxes Municipal property taxes are payable by the property owner and are commonly passed to tenants through the lease payments. These taxes are based on: (i) the assessed value of the property; and (ii) the property’s use classification. Some municipalities offer exemp - tions or reduced rates to: (i) public or non-profit organisations; and (ii) properties located in designated development incentive zones. 8.4 Income Tax Withholding for Foreign Investors The taxation of rental income earned by non‑residents investing directly in Canadian real estate depends on whether the income is characterised as business income or income from property. The more actively
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