Canada: Taxes On The Transfer And Leasing Of Real Property In Canada

The transfer of real property is subject to a land transfer tax in most, but not all, provinces in Canada.

Where these taxes are payable, they are payable by all purchasers (subject to certain limited exemptions), whether the purchaser is a resident or non-resident of Canada. The tax is calculated by applying a graduated tax rate to the total value of the consideration paid for the property.

For instance, in British Columbia, the tax is 1% on the first $200,000 of fair market value and 2% on the balance. For commercial properties in Ontario, a rate of 0.5% is applied to the first $50,000, a rate of 1% to the value of consideration higher than $50,000 but not exceeding $250,000 and a rate of 1.5% to amounts higher than $250,000. Québec has similar land transfer tax rates to Ontario, while Alberta has no land transfer taxes but imposes registration fees to transfers at a rate of just 0.1% of value.

In Canada, a goods and services tax ("GST") is payable upon a supply of real property, unless otherwise exempted, under the Excise Tax Act. This includes the sale of a property, as well as a lease, license or other similar arrangement. GST is a value-added tax of 7%, except in the provinces of Nova Scotia, New Brunswick and Newfoundland, where the equivalent tax is 15%.

Registration under the Excise Tax Act for GST is mandatory for every person who makes a taxable supply in Canada in the course of a commercial activity except in certain limited circumstances, including where the taxpayer is a non-resident who does not carry on any business in Canada or where the taxpayer’s only commercial activity is making supplies of real property by way of sale, other than in the course of a business.

Generally, it is the "supplier" (the seller) that is obligated to collect GST from the "recipient" (the buyer) of the real property. However, the buyer may be responsible for paying and remitting the GST in situations where the seller is a non-resident person and the buyer is registered for GST purposes.

If a purchaser or tenant is required to pay GST on a property, it may be able to claim input tax credits for the tax paid, which permits the taxpayer to apply for a refund of GST. Input tax credits are only available to purchasers or tenants who are registered for GST purposes and who acquire a property for commercial purposes.

A non-resident seller of real property in Canada should be prepared to provide to a purchaser a clearance certificate from Canada Customs and Revenue Agency ("CCRA"). Otherwise, a purchaser may hold back from the closing funds a withholding tax on behalf of CCRA, regardless of whether this has been agreed to in the contract of purchase and sale and regardless of whether the seller owes tax or qualifies for an exemption.

In order to ensure that a non-resident seller pays Canadian tax owing on the disposition of taxable Canadian property (which generally includes all real property), a seller is to report the transaction to, and obtain from, CCRA a clearance certificate for the taxes potentially owing as a result of the sale transaction. If a seller fails to comply, a purchaser may potentially be liable for the tax under s. 116 of the Income Tax Act. Accordingly, a purchaser may holdback from the closing proceeds an amount equal to 25% or 50% of the purchase price. On a practical level, purchasers generally hold back 50% as it may be difficult for a purchaser to ascertain whether a seller holds real property as capital property or as inventory (being the distinction between the percentage amounts to be withheld).

The purchaser is obligated to remit these amounts to CCRA within 30 days after the end of the month in which the property was acquired. A seller should keep this time frame in mind if it is not able to deliver a clearance certificate until after the closing date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.