CANADA Law and Practice Contributed by: Rachel V Hutton, Michael L Dyck, Mario Paura and Miguel Manzano, Stikeman Elliott LLP
8.3 Municipal Taxes Municipal property taxes are payable by the owner of the property and are generally passed on to tenants. These taxes are typically cal - culated based on the use and assessed value of the property. Some municipalities provide exemptions for public and/or non-profit organi - sations, or for geographical areas in which the municipality wishes to provide an incentive for development. 8.4 Income Tax Withholding for Foreign Investors The taxation of rental income for a non-res - ident of Canada directly invested in Canadian real property depends partly on whether such income is characterised as income from prop - erty or income from carrying on a business. Generally, the more effort expended in respect of the property, the higher the likelihood it will constitute a business. Tax on a Business If the rental income constitutes carrying on busi - ness in Canada, the non-resident will generally be subject to tax on its net income attributable 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
242 CHAMBERS.COM
Powered by FlippingBook