CANADA Law and Practice Contributed by: Rachel V Hutton, Michael L Dyck, Mario Paura and Patrick Morin, Stikeman Elliott LLP
be subject to tax on their net income attribut - able to that rental business. The rate of tax paid is generally the same as that which is paid by Canadian resident corporations (approximately 26.5%). In addition to the mainstream Canadian tax on Canadian-source income, the non-res - ident will also be liable to pay a branch tax of 25% on its after-tax Canadian profits that are not reinvested in its Canadian business. The branch tax can be limited to 5% if the non-resident’s members are corporations that are entitled to the benefits of the Canada-US Tax Treaty (with the first CAD500,000 of earnings being exempt from the branch tax). Tax on Passive Payments Passive payments such as dividends, interest, royalties and rent made by a Canadian resident to a non-resident are subject to Part XIII Cana - dian gross withholding tax of 25%, which may be reduced by virtue of a tax treaty between Canada and the state of residence of the non- resident. As an alternative to the 25% gross withholding tax regime, a non-resident can make an elec - tion in respect of its passive rental income (a “Section 216 election”) that will allow it to file a Canadian income tax return and be taxed on a net basis (ie, after deducting its expenses asso - ciated with the property). The rate of tax payable is the same as that paid by Canadian resident corporations (ie, approximately 26.5%). Tax on Disposal of Taxable Canadian Property (TCP) Non-residents are subject to Canadian income tax under the Canadian Income Tax Act (ITA) if, among other things, they dispose of taxable Canadian property (TCP). For these purposes, TCP includes a direct interest in real property or an interest in a private corporation, partnership
or trust where, at any time in the last 60 months prior to the date of disposition, more than 50% of the value of the interest is derived primarily from real property situated in Canada. Relief may be available under an applicable income tax treaty if the sale of an interest in a corpora - tion, partnership or trust does not, at the time of sale, derive more than 50% of its value primarily from real property situated in Canada. Where a non-resident of Canada proposes to sell TCP, the purchaser may be required to with - hold 25% (for non-depreciable capital property) or 50% (for depreciable property) from the pur - chase price, unless the non-resident applies for and is granted a clearance certificate by the Canada Revenue Agency in advance of the date the property is disposed of. In addition, a non- resident must notify the Canadian tax authorities about a disposition of TCP either before they dispose of the property or within ten days fol - lowing the disposition. VAT on Rent For a discussion of VAT on rent, see 6.7 Pay- ment of VAT . 8.5 Tax Benefits In computing net rental income (ie, where income is earned by a resident entity, where rental income earned by a non-resident constitutes business income, or where a Section 216 elec - tion has been made by a non-resident earning property income), certain expenses incurred in earning such income may generally be deducted for the purposes of calculating Canadian income tax, including operating expenses, reasonable financing costs and tax depreciation. Tax depreciation may be claimed on buildings and other depreciable property used to earn rental income. Tax depreciation is allowed gener -
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