CANADA AND QUEBEC
TAXATION
How do taxes work in Quebec? What impact can Canadian taxation have on your real estate investment project or your move to Montreal?
You wish to buy a property in Quebec, a pied à terre in Canada, or you have just landed a job in Montreal or the pursuit of your studies in one of the prestigious universities of our beautiful province… Naturally, as an informed buyer, you are wondering what the tax consequences will be for your project.
Here is a quick overview.
IN A NUTSHELL
THE BASICS OF THE TAX SYSTEM IN CANADA AND QUEBEC
Canada is a federal country, composed of provinces, involving several administrative and governmental levels in different fields: taxes are no exception to this principle with a federal level of taxation for Canada and a provincial level of taxation for Quebec.
Taxpayers are therefore required to pay taxes to both governments, via a declarative system. The tax is based on a progressive system, which means that the percentage to be paid is less if you earn less income and increases proportionally to the income.
Thus, Quebec taxpayers must file two tax returns and will receive in return a notice of assessment from the Canada Revenue Agency (CRA) and another from the Agence du Revenu du Québec (ARQ).
Please note that taxes are calculated on an individual basis, not on a family or couple level, and that taxes are deducted at source.
The deadline for submitting your tax return is April 30 of the calendar year following the tax year. If you are self-employed (a person who works for himself), you will have until June 15.
It is interesting and important to note that Canada does not have a wealth tax, unlike France which has the IFI (tax on real estate wealth).
In terms of taxation, a crucial question appears: the determination of your tax residence, according to your situation..
WHAT IS CANADIAN TAX RESIDENCY?
Individuals resident in Canada and in a country with which Canada has a tax treaty are considered residents of the country where they have the most significant social and economic ties.
Individuals who do not have significant residential ties with Canada and have been in Canada for 182 days or less in the year may be considered non-residents of Canada.
Note that the notion of tax residency may have slightly different approaches between Canada, Quebec and France. Making choices at the right time and having the foresight to question our specialists will allow you to benefit from our know-how, which can help you avoid certain setbacks and save money.
International tax treaties govern the situation to avoid double taxation. HP & Associés will be able to put you in touch with competent tax specialists to obtain answers specific to your personal situation.
TAX DIFFERENCE FOR A RESIDENT VERSUS A NON-RESIDENT
Of course, as with any tax system, you will not be treated the same if you are a Canadian resident or a foreign investor. Here is a quick overview of the differences in taxation depending on your status.
FOR A CANADIAN RESIDENT
The capital gain or appreciation is not taxable on the principal residence. Any other property, whether it is a secondary residence or a rental property, is subject to a tax, which will be modulated according to the owner’s income.
FOR A NON-RESIDENT OF CANADA
The Canada Revenue Agency (CRA) and the Agence du Revenu du Québec (ARQ) require non-residents to complete specific forms when they own rental properties or when they dispose of these properties (sale of the property).
It is important to apply to the CRA for a tax identification number (TIN) as soon as the property is acquired. This number will facilitate communication with the CRA and the filing of tax forms.
Taxation of rental income for a non-resident
It should be noted that income earned through the rental of furnished property is taxable only at the federal level.
The tax to be paid will be about 25% of the NET income.
It is advisable to consult a tax specialist as soon as you acquire the property in order to start your tax file and make the necessary arrangements with the CRA in order to pay the tax on 25% of the NET income, and not 25% on the GROSS income while waiting to file your tax return.
Taxation of capital gains (appreciation) for a non-resident
The capital gain is taxable at 50% of the capital gain, at a rate of 37.5%.
It is important that at the time of the acceptance of a promise to purchase, the non-resident seller takes the necessary steps with the CRA to obtain certificates of compliance.
In fact, the notary in charge of drafting the sale documents for the property will have to hold back the proceeds of the sale, pending the certificates of conformity from the CRA.
The support of a real estate broker and a tax specialist who are familiar with the particularities of a non-resident’s file is essential in order to take the right action at the right time and thus avoid delays and penalties for non-compliance.
The distinction between primary and secondary residences
Principal residence: Dwelling occupied on a regular and principal basis by a household.
Secondary residence: As opposed to a principal residence, which is “the dwelling usually occupied on a principal basis” by a household, a secondary residence is defined as the place where you do not reside for most of the year.
VARIOUS TAXES RELATED TO THE OWNERSHIP OF A PROPERTY
The real estate industry has its own specific taxes. Here is a quick overview of what you can expect.
Transfer tax, commonly called the welcome tax
A one-time tax collected by the municipality when a property title is transferred. The rate varies from municipality to municipality, and varies in percentage increments based on the higher of the purchase price or the municipal assessment.
For more details on this welcome tax, you can consult our article Financing and Investment.
Municipal taxes
Property tax collected by the municipality where the property is located. The tax rate varies from one municipality to another and is based on the municipal evaluation of your property.
School taxes
A tax levied by the local school board in the territory on which a property is located to finance the operation of schools, including school transportation. The tax rate varies from one school board to another and is based on the municipal assessment for your property.
Convenons qLet’s admit that the subject of taxation is vast and that we have presented here a few generalities. In the meantime, you can consult this brochure from the Canada Revenue Agency for additional information for newcomers to Canada in 2021.
GOOD ADVICE FOR A SERENE TAXATION
Each person’s situation, both in terms of family and patrimony, necessarily implies an in-depth study for the success of your project and its tax consequences. The first recommendations of our real estate agency with the experience of HP & Associés brokers, coupled with the enlightened advice of our tax specialists, will successfully pave the way for your next acquisition, with complete peace of mind.
