Tag: CRA

2024 Federal Budget: Capital Gains Tax

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2024 Federal Budget: Capital Gains Tax

In the 2024 federal budget unveiled on Tuesday April 16th, the Finance Minister said the government would increase the inclusion rate of the capital gains tax from 50 per cent to 67 percent for corporations and trusts. Individuals will still have the 50% inclusion rate apply on capital gains of up to $250,000 annually, but will now be subject to the 2/3 inclusion rate on capital gains in excess of $250,000 per year.

While the Feds claim this will only affect less than 1% of the population, we strongly disagree. This will negatively affect all people who own corporations with investments, (including most small businesses) discourage capital investment in corporations (hurting innovation productivity and entrepreneurs, and the jobs they support), all estates (leaving less for their families and future generations), and all individuals with one-off significant tax events (who may be hard working, rather than idly rich).

Why is the change important?

The proposed 2/3 inclusion rate applies only to capital gains realized after June 25, 2024. That means there is a short time window to decide if unrealized gains should be realized now.

If you have significant capital investments (whether in a corporation, trust, or held personally), we recommend a consultation with one of our tax professionals to better understand the implications of this new policy on your investments, and discuss possible planning opportunities. Please note that these proposed policies are new and complex and we are watching it unfold. Our team will need some time to engage with more advanced commentary coming out from the government and tax community in the coming weeks before we can comprehensively consult in all circumstances.

If you have personal investments outside your RRSP or TFSA, you will want to analyze your portfolio to assess changes in taxation and strategy. For investments in an unrealized gains position, you may want to sell in advance of June 25 to take advantage of the existing lower tax rates on amounts over $250,000. You will also want to consider the timing of selling to limit gains in any one year to $250,000 to protect your gains from higher taxation. If you are in a loss, you may want to defer the losses until they are included at the higher rate.

If you hold a second property that you are looking to sell, you may want to crystallize a gain before June 25th to avoid higher taxes on the disposition of the property.

If you hold investments in a corporation that you are carrying at a gain, we want to consider the circumstances under which it would be advantageous for you to sell those investments, taking advantage of the 50% inclusion for taxes, and the 50% inclusion into your Capital Dividend Account (cash that can be paid out tax-free later).

Additionally, any corporations that are selling assets to reinvest in their business (by redistributing those funds into a different business or product line) will need to revisit planning for higher corporate tax rates on corporate investment dispositions, and we are happy to help with that forecasting.

For anyone with estate planning, we have a short window of time to consider changes required to recalibrate the tax exposure in the year of death where dispositions often exceed $250,000.

If you are concerned for your tax planning, we encourage you to reach out via email, and we look forward to helping you plan for your future.

Let’s look at the math:

Let’s say you’re a BC professional and part of your financial strategy is to create savings in your small corporation and draw down that corporate investment portfolio to fund your cost of living as needed. Following your annual income strategy, you examine your personal needs: with the increased cost of borrowing (interest) and groceries, kid camps etc you determine you need to sell part of your portfolio, which will trigger a $50,000 CAD capital gain. See below for our analysis and walkthrough. Under the current rules, we pay 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes! For someone who takes home an extra $30-35k a year…Capital Gains Increase 2024

Technical Walkthrough

Current Rules:

  • Under the current rules, half is taxable. And half goes to the capital dividend account (CDA), which can be withdrawn tax-free as a capital dividend. We now have $25k of tax-free gains, and $25k of taxable gains.
  • The taxable half is subject to two different taxes- one permanent , and the other refundable. 
    • On this transaction, you will pay 20% or $5,000 in permanent tax. Just like it sounds, you pay this, and you can’t get it back.
    • You will also pay 30.67% or $7,667 in refundable tax. You can get this back by paying yourself a non-eligible dividend. (You recover 38.33% of the refundable tax for every dollar paid out as a non-eligible dividend.)
  • So far in this scenario, there has been approximately $12,667 in total taxes paid. Now, we have to get back the refundable tax. 
  • To trigger a full refund, you need to pay a non-eligible dividend of $20,005 to get the refundable portion back ($7,667/38.33%). So, you pay out that refundable tax as part of that $20,000 dividend, and that dividend is taxed to you personally. 
  • In BC, at the top rates, a non-eligible dividend is taxed at 48.9%. That leaves us with $10,220 after tax, plus the $25k tax-free dividend.

In the end, we triggered a $50k capital gain and you had $35,220 left after tax. That’s an effective tax rate of about 29.50% on our capital gain.

Proposed Rules*:

*note, these rules are newly released and not thoroughly communicated by the Federal Budget. Specifically Refund Dividend Tax on Hand, Alternative Minimum Tax, and the new proposals for integration under the income tax act are not clear. This is for analysis purposes only. 

  • Under the proposed rules, instead of half of the capital gain being tax-free, now only 1/3rd of it is. This changes the outcome significantly. Now a $50,000 capital gain gives us only a $16,667 tax-free capital dividend, and we include $33,333 in corporate income.
  • The taxable half is subject to two different taxes- one unrecoverable, and the other recoverable.  
    • 20% is permanent, so $6700 tax paid
    • 30.67% is refundable, and you pay $10,273 in refundable tax.
  • So far in this scenario, there has been approximately $16,666 in total taxes paid.  Now, we have to get back the refundable tax. 
  • To trigger a full refund, you need to pay a non-eligible dividend of $26,800 to get the refundable portion back ($10,273/38.33%). So, you pay out that refundable tax as part of that $26,800 dividend, and that dividend is taxed to you personally. 
  • That dividend is taxed at 48.9%, leaving $13,694 after-tax, plus the $16,667 tax-free dividend.

In the end, we triggered a $50k capital gain and you had $30,194 left after tax. That’s an effective tax rate of about 39.6% on our capital gain.

Under the current rules, we paid 29.50%. Under the new rules, our tax rate increased by 10%. That’s 34% more taxes!

If you are a Metrics client and would like to book a consultation with your tax advisor, please email [email protected]. If you are not currently a Metrics client, CLICK HERE to complete our contact form for new clients.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

New GST/HST Guidelines for NFT Sales

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New GST/HST Guidelines for NFT Sales

Despite what many sites advertise, yes, NFTs are subject to GST/HST.

The Excise Tax Act in Canada imposes GST/HST on “every recipient of a taxable supply made in Canada”, and Canada Revenue Agency (“CRA”) has recently provided updated guidance which clarifies that NFTs, specifically, will be subject to GST/HST.

NFT sellers are obligated to collect GST/HST from Canadian buyers if they earn more than $30,000 in annual gross revenue. This means that Canadian NFT sellers who earn more than $30,000 in sales of NFTs are required to register for GST/HST and pay these taxes to the CRA.

Under CRA guidance, unless you can prove that the sale of your NFT is made outside Canada (which, given the anonymity of the marketplace, is unlikely) you will be taxed as though you sold to Canadians and collected GST/HST on your gross sales. Since you cannot identify the geographical location of your buyer you will be deemed to charge and collect GST/HST in your own province.

Why is this guidance a big deal?

Under the current Excise Tax Act, sales made to non-Canadians buyers, who do not use the asset in Canada, are not subject to GST/HST. Until now, and given the international nature of NFT sales, NFT sellers may have been assuming that all or substantially all of their sales were international, and therefore exempt sales under the Excise Tax Act (this assumption could have been supported by online knowledge of the buyers, the geographical location or mix of the online marketplace or other factors). Now, this interpretation has specified that in the absence of proof of your buyer as OTHER than Canadian, the CRA will assume they are Canadian and have GST/HST apply on 100% of your gross sales.

Furthermore, as a buyer, since you cannot identify the seller as Canadian or otherwise, and without a GST number for your purchases, you will not be eligible to claim GST/HST paid on your cost of sales for the NFT transactions.

If your NFT portfolio did not net more than your provincial GST/HST rate, you could end up in a deficit and still owe GST/HST to CRA. This is specifically relevant in Ontario and the eastern provinces that have HST of 13-15%, as the GST/HST rate charged is a direct cut off of your profit.

These excise tax considerations are the same whether the NFT sales are classified as business or capital under the Income Tax Act. Technically, for excise tax this creates a GST/HST Collected obligation for the seller in the absence of GST Paid offsetting tax credit.

Functionally, for the industry this creates a cycle where GST/HST is paid on all transactions in the Canadian NFT industry and claimable on none. Regulators view it as the downside of participating in an anonymous ecosystem. Many view it as an assault on the NFT industry in Canada.

At Metrics, we believe this interpretation creates a strong disincentive for NFT businesses to continue to operate in Canada, and especially in provinces with HST. We will continue to work with regulators including the CRA to clarify NFTs as emerging digital assets that deserve unique interpretations under the Income Tax Act and Excise Tax Acts. Until change comes, we are dedicated to working with our clients to accurately interpret the tax laws as they apply to Canadian businesses.

For all Metrics clients, we will be working with you to establish the effects of this interpretation on your portfolios.

Planning opportunities

For planning purposes, we note the following opportunities and exemptions:

• If your NFT assets are not available for sale in Canada, the impossibility of Canadian sales will exempt those sales from Excise Tax.

• If you know the NFT purchaser, and can obtain a legal address, and that legal address proves them as non-Canadian, your sales will be exempt from GST/HST.

• If there are other pressing business reasons and regulatory considerations putting pressure on your NFT business, you could consider departing from Canada. This is a major tax event that would need to be examined carefully prior to being executed.

• In our considerations of NFT activity the only current and obvious case for exemption is NFTs issued for purposes of liquidity pool ownership and same or similar mechanisms that do not satisfy the criteria for a taxable supply under the Excise Tax Act.

• Given that tax considerations are not currently built into NFT smart contracts, the amount that a seller collects will not vary. This means that NFT sellers either have to raise their prices by 5-15% (depending on your provincial GST/HST rate), or have to plan to take that same 5-15% off the top of your sales and remit the cash to the CRA.

How does this compare to similar TradFi transactions:

In traditional finance transactions, say a BC company sells two pieces of art for value of $100,000 CAD each: Art Sale 1 is to a Canadian business in Victoria BC, and Art Sale 2 to an American business in Los Angeles.

Art Sale 1: Art sold to Canadians: The price is $100,000 and GST applies on the sale of the art. In this case GST of 5% or $5,000. The seller would collect $105,000, keep $100,000 and collect and remit $5,000 to the government for GST Collected.

Art Sale 2: Art sold to Americans: The price is $100,000 and this is an exempt transaction for GST/HST. The seller would collect $100,000, keep $100,000 and collect and owe $0 to the government for GST.

In other words, the TradFi system is set up to identify all sellers and buyers and share that information. This exchange of identity allows this system to work under the current regulations.

Now let’s examine this for NFT companies, say a BC company sells two pieces of NFT art for a value of $100,000 CAD each. No identification of the buyers is available, and in the absence of availability in Canada, the NFT is deemed to be sold to a BC company and 5% GST is required to be charged on the transaction.

Art Sale 1: The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Art Sale 2: is the same as art sale 1: The price is $100,000. The seller would collect $100,000 which would be deemed to be GST inclusive at BC’s rate of 5% or $4,762. The seller will keep $95,238 and remit $4,762 to the government for GST.

Income Tax Effect

Example 1:
Assume you live in Ontario, and you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $120,000 (equivalent in ETH at time of sale). You may have thought you made $20,000. However, based on the GST/HST discussed above, you would owe $15,600 in HST, making your net profit $4,400 (less gas costs, exchange fees, etc), rather than $20,000. When you pay the HST on this transaction, it reduces your profit for income tax purposes, so you would only pay income tax on the profit of $4,400, rather than the $20,000 pre-HST amount.

Example 2:
If you bought a BAYC for $100,000 CAD (equivalent in ETH), and sold it for $1,200,000 (equivalent in ETH at time of sale) in Ontario, you would owe $156,000 in HST, making your net profit $944,000 (less gas costs, exchange fees, etc), rather than $1,100,000.

So, regardless of the price/profit when sold, the HST has the same effect. You would pay income tax on the net profit only, after the HST has been considered.

Learn More from Metrics

The digital world has witnessed an exciting and revolutionary development: the rise of non-fungible tokens (NFTs). Unfortunately, the cutting-edge nature of NFTs means that many NFT makers, buyers, sellers and investors are unaware of their tax obligations. Additionally, interpreting the current and evolving regulatory landscape can be extremely complicated. If you are looking for answers regarding NFTs and Canadian taxes, you can learn more by contacting us at [email protected].

If you need help navigating NFT taxation and reporting, CLICK HERE to book a consultation with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Foreign Reporting Requirements for Cryptocurrency (Form T1135)

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Foreign Reporting Requirements for Cryptocurrency (Form T1135)

The CRA requires that individuals, corporations and certain partnerships and trusts that hold “specified foreign property” (SFP) with an aggregate cost basis of over $100,000 CAD at any time during the tax year report using form T1135 – Foreign Income Verification Statement.

Late filing of the form attracts a hefty penalty of $25 per day up to a maximum of $2,500. There CRA can also choose to assess ‘gross negligence’ penalties of $500 per month up to a maximum of $12,000 for failure to file the form.

If you hold cryptocurrency that has a cost basis of $100,000 or more, you will have to file this form with your personal tax return (T1) or corporate tax return (T2), depending on whether you own it personally or through a corporation, unless certain exceptions are met. Trusts and partnerships must also file this form, if applicable.

Is cryptocurrency considered “specified foreign property”(SFP)?

A common question from taxpayers and advisors has been – when is cryptocurrency considered to meet the definition of “specified foreign property”?

The CRA has been slow to comment on cryptocurrency taxation issues, but has provided updated guidelines for tax considerations, and has recently commented on form T1135 in response to clarifying questions posed by CPA Canada, which will be discussed further here.

Most often, taxpayers would be familiar with this form when SFP is held such as shares of foreign companies (i.e shares of publicly traded US corporations).

Included in SFP is “intangible property situated, deposited, or held outside Canada”. The CRA has commented:

“As stated in Technical Interpretation 2014-0561061E5, it is the CRA’s view that cryptocurrency (referred to at the time as “digital currency”) is funds or intangible property. As such, cryptocurrency may need to be reported on Form T1135 depending on where it is “situated, deposited or held”.”

So yes, cryptocurrency may be considered to be SFP by the CRA, and may need to be reported on form T1135.

Where is cryptocurrency situated, deposited, or held?

This has been the tricky part. Where does cryptocurrency exist? If you hold cryptocurrency in cold storage, is it situated where your hardware wallet is stored? If it is held by an intermediary such as an exchange, does the location of the exchange dictate this? What if the exchange is Canadian, but they store cryptocurrency in cold storage in another country? If that is the case, how would we know?

The fact that cryptocurrency is for lack of a better word “stored” on a blockchain argues that it can exist simultaneously in many geographical locations. So, can it arguably be ‘situated’ anywhere?

With all of this uncertainty and without going down rabbit holes of exchanges, intermediaries, nodes, and hot vs. cold storage, we have generally taken the stance as advisors that cryptocurrency is always considered to be situated, deposited, or held outside of Canada, and recommend including the cost basis of all crypto assets in determining foreign reporting requirements.

Like many complex questions regarding cryptocurrency, looking at traditional finance examples is often helpful where no guidance or legislation provides answers, which is what the CRA has done here, referring to where the shares of a corporation are ‘held’:

“…shares of a Canadian resident corporation held by a non-resident agent for the benefit of a Canadian reporting entity are considered to be intangible property situated, deposited or held outside Canada.”

So, the CRA is extrapolating that intangible property, even if it is shares of a Canadian company, if managed/held by a third party (such as an exchange), and if that third party is situated outside of Canada, the property would be SFP for the purposes of the T1135.

What about when the third party that is custodian of your crypto is a Canadian crypto exchange? The CRA commented:

“Where cryptocurrency is held through an intermediary, characterizing the relationship between that intermediary and the taxpayer may be relevant in determining whether the cryptocurrency is situated, deposited or held outside Canada. In Canada, intermediaries that wish to offer crypto assets services to Canadian clients must comply with guidelines issued by the Canadian Securities Administrators (“CSA”) – referred to by the CSA as “crypto trading platforms” or “CTPs”. While the determination of where cryptocurrency is “situated, deposited or held” is a question of fact that can only be determined after a review of all the documents and the circumstances applicable to a particular situation, it is our view that, where CTPs are resident in Canada and comply with Canadian regulations, cryptocurrency held through such CTPs for the benefit of Canadian clients will typically not be considered as “situated, deposited or held” outside Canada.”

We find this a bit too ambiguous to comfortably determine what portions of a taxpayer’s cryptocurrency holdings would fit into these parameters. It could be argued based on this CRA comment that if all of your crypto holdings are in a compliant, Canadian CTP, and you hold no other SFP, then you would not need to file form T1135.

Barring unique situations, we still recommend that all cryptocurrency holdings be included in the consideration for the total cost basis of SFP.

Capital vs. Inventory

There is a common ‘carve-out’ rule that excludes cryptocurrency and other property from being considered SFP. If the property is used or held exclusively in an ‘active business’, then it is not included in specified foreign property.

The distinction of capital property vs. inventory is important for those trading cryptocurrency, either as an individual or a corporation. There are several determining factors to consider whether trading activity is capital in nature, or constitutes an active business (again, this is out of scope for this discussion).

In short – assuming that ‘day-traders’ of cryptocurrency are carrying on an active business (this is complicated and requires analysis to determine), the cryptocurrency held is considered inventory of the active business, and is not required to be reported for the purposes of form T1135. Note: there may be situations where some property held is inventory in active business and some is capital property.

This would likely not apply to holders that have purchased cryptocurrency over time, with the intention of holding for appreciation in value over the long-term and/or receiving staking rewards. This situation better reflects that of a traditional stock investor, and would likely be considered capital property for taxation purposes and included as SFP for form T1135.

The CRA also commented on whether crypto held in an “adventure in the nature of trade” would be considered inventory held in an active business. This would be applicable in a case where someone who has never dabbled in cryptocurrency decides there is an opportunity for a quick flip for profit and, say, purchases a bunch of BTC, and sells the next day for a substantial profit.

This is likely not a capital transaction, but also per the CRA comments, does not constitute carrying on an active business. This would be an adventure in the nature of trade. Therefore, if at one point in the year, the person in this example held BTC with a cost basis of $150,000, and sold it the next day, they would be required to file form T1135 in that year:

“…although an adventure or concern in the nature of trade is included in the definition of the term “business” in section 248, it does not necessarily mean that a taxpayer who is engaged in an adventure or concern in the nature of trade is “carrying on” a business or has “carried on” a business. Where it is established that property such as cryptocurrency or NFTs are held or used in an adventure in the nature of trade, CRA will consider that such property is not held or used “in the course of carrying on an active business” for purposes of applying paragraph (j) of the definition of “specified foreign property” in subsection 233.3(1) of the Act. As such the exclusion provided in that paragraph would not be applicable with respect to the property.”

T1135 Filing Due Date

The due date for filing form T1135 is the same date as income tax returns for individuals, corporations and trusts and the same date as the partnership information return for partnerships. See HERE for dates.

If you need help navigating cryptocurrency taxation and reporting, you can CLICK HERE to book a consultation with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Why Incorporate Your Professional Practice?

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Why Incorporate Your Professional Practice?

A professional corporation is used when individuals run their own practice and wish to provide their professional services through a corporation for the reasons mentioned in this article.

Incorporating your practice has many advantages; the main one is being able to defer your taxes. A corporation becomes useful when your earnings exceed your living requirements in a year.

Canadian taxes use a marginal rates system. As your personal income increases, so do the tax rates, resulting in higher taxes on higher income. The top tax bracket in British Columbia is 53.5%. The corporation tax rates are 11% on the first $500,000 and 27% beyond that.

For example, assume you earn $250,000 personally in a year but only require $100,000 to live. You then have $150,000 in excess earnings on which you pay personal income taxes. Your personal tax rate would generally be higher than that of a corporation. With the use of a corporation, the excess of $150,000 can remain in the corporation.

Though the corporation is subject to tax, the tax rates are significantly lower. In the example above, you can defer more than $45,000 in taxes annually. These savings can then be reinvested in your business or saved for retirement. The compounded savings can go a long way, making it clear why incorporating is an optimal approach.

Another benefit comes into play when you are purchasing a practice (ex. dental practice) through financing. The loan repayment becomes more tax efficient when done through a corporation. As the corporate tax rates are lower, you are left with more after-tax money that can be used to repay the loan more quickly.

Liability in a Corporation

Having a corporation in place provides an added layer of security against personal liability. It makes it more difficult for someone to go after personal assets if the business defaults on its debts. However, it is important to know that professional liability is not limited in any way by practicing within a corporation.

Income Splitting (TOSI)

In 2018, the federal government introduced new rules to deter business owners from splitting income with their family members, and Tax on Split Income (TOSI) was introduced. TOSI taxes the split income the family member receives at the highest tax rate unless an exception applies.

Interest or dividends from a public corporation or mutual fund corporation (investment portfolio) may be split without the application of TOSI. We recommend you discuss this with us before you pay dividends to your family to see if you fall within any exceptions.

Lifetime Capital Gains Exemption (LCGE)

Where your practice can be sold, or the shares of the corporation can be sold, a corporate structure will allow for the use of the lifetime capital gains exemption. This is a common tax plan for retiring professionals who can sell their practice.

The lifetime capital gains exemption allows each individual shareholder who is selling their shares to shelter the first $971,190 (for 2023 – indexed each year) of capital gains from tax. That means the first $971,190 of capital gains will be tax-free.

The lifetime capital gains exemption is available to each taxpayer. This means that on the sale of your practice, the lifetime capital gains exemption may be multiplied by including your spouse, children, and parents as shareholders of the corporation (subject to your college’s by-laws).

To qualify for the lifetime capital gains exemption, the shares of the corporation must be of a Qualified Small Business Corporation (QSBC). Various conditions must be satisfied to meet the qualification. The Small Business Corporation must be carrying on an active business and:

  • It must be a Canadian company controlled by Canadians (at least 50% Canadian ownership);
  • it must be a privately owned company (not publicly traded);
  • at the point in time of disposition of the shares, 90% of the fair market value of the assets of the company must be used by it, or by a company owned by it, in an active business carried on in Canada;
  • for the 24-month period prior to any sale of the shares, the fair market value of the assets used in the active business of the company must be at least 50% of the total fair market value of the assets; and
  • where there are holding companies or numerous operating companies, the qualifying assets in each company must meet certain percentage tests for use in an active business.

One thing to watch out for is when your investments portfolio, excess cash, or assets not used in your active business grow beyond the qualifications stated above. When your corporation is in such a position, we have a remedy.

Professional Services through a Partnership

If you offer your professional services through a partnership, you can also hold your partnership interest through your corporation. By holding your partnership interest through a corporation, you are able to defer taxes and possibly get the lifetime capital gains exemption as discussed above. Generally, the rollover of partnership interest into your corporation can be done on a tax deferred basis as well.

Purifying and Creditor Proofing

We may be able to solve the issues mentioned above by “purifying” the professional corporation and moving the inactive assets into a holding company on a tax-deferred basis. This results in the assets to be held by another corporation and not your professional corporation. In addition to bringing your corporation on-side to be able to use your LCGE, this plan also aids with creditor proofing.

If you are interested in learning more about incorporating a professional practice, or how we can optimize your existing corporation, book a consultation with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Departing Canada (and the tax requirements)

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Departing Canada (and the tax requirements)

Leaving Canada and becoming a non-resident of Canada results in a departure tax. This means that on departure, you are deemed to have disposed of all your assets (with some exceptions) at fair market value and reacquired them at fair market value, resulting in capital gain on these assets.

Some properties that fall within the exemption are:

  • Canadian real or immovable property (e.g. land and building)
  • Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada
  • Pension plans
  • RRSP
  • RESP

Owning Shares of a Corporation

If you have a business in Canada and you are departing Canada, these shares would also be subject to the deemed disposition rules. A deferral of the tax payment can be applied for by posting security (such as the shares of the company) with the CRA. The deferral allows you to defer the tax payment until such property is actually sold.

Alternatively, you may be able to claim your lifetime capital gains exemption on the deemed disposition of your shares. The lifetime capital gains exemption allows for a deduction on the gain of your corporate shares, up to a maximum of $971,190 (for 2023 – indexed each year). However, the exemption is only available if the shares are that of a Qualified Small Business Corporation. We would be happy to help you analyze further if your shares qualify. Claiming the lifetime capital gains exemption generally makes sense if you plan to sell the shares to a third party at a later date, or if combination of withholding tax and the tax in the new country is lower than taxes here in Canada.

The deemed disposition inherently results in double taxation. The first level of tax is when paying the departure tax, and the second is when you extract the value by ways of dividends (even when security is pledged or a lifetime capital gains exemption is claimed). Planning can be put in place with our tax team to mitigate double taxation.

For example, if you were to own shares in a company worth $2,500,000 upon leaving Canada you’d pay the following:

  • Departure tax when leaving Canada: $620,000
  • Withholding tax on dividends: $ 625,000 
  • Total tax paid in Canada: $1,245,000 

Various strategies could be put into place to help mitigate the double taxation. For example, dividends or claiming the lifetime capital gains exemption can be utilized to reduce the tax burden.

Renting Real Estate

Though Canadian Real Estate is not subject to the deemed disposition rules, there are rules to be aware of when it comes to non-resident-owning real estate. As a non-resident owning real estate, you will be subject to withholding in Canada. A Canadian Agent is required to withhold and remit your withholding taxes to the CRA on a monthly basis. If you do not have a Canadian Agent, your tenant may be liable for this.

The withholding tax is 25% of the GROSS rental income. You can file an NR-6 to request that the withholding be 25% of NET income instead.

Your agent will also need to issue you an NR4 – showing you the amount of tax that was remitted.

Lastly, you can file a section 216 return. A Section 216 Return allows you to pay tax on your net Canadian rental income instead of the gross amount. If the non-resident tax that the agent withheld is more than the amount of tax payable on your Section 216 return, the CRA will refund the difference to you. If you filed the NR6 and the CRA approved it, you have to file a Section 216 return as well.

Underused Housing Tax (UHT)

A new Underused Housing Tax (UHT) was introduced in 2022. This is a new tax on underused homes in Canada. The tax is 1% of the taxable value of the home, or 1% of its most recent sale price, whichever is greater. There are some exceptions that apply. One of the exceptions is Canadian citizens and permanent residents. If you are departing Canada, you must determine if the UHT applies to you. You can click here to read our blog post about the legislation.

If you are planning on leaving Canada in the near or distant future, we can help make the process as seamless and stress-free as possible. Book a consultation with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

Underused Housing Tax (UHT)

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Underused Housing Tax (UHT)

To combat the housing crisis, effective January 1, 2022 the Federal Government introduced the Underused Housing Tax (UHT) which requires certain non-Canadian owners (and, in certain circumstances, some Canadian owners) of residential property in Canada to file an annual return to report their ownership and, subject to certain exemptions, pay a 1% tax on the property’s value (the UHT).

With the 2022 filing deadline of April 30 approaching, we want to ensure residential property owners are well informed.

Filing Requirements

If you own residential property situated in Canada, you must file a UHT return (form UHT-2900) by April 30 each year, unless you are an excluded owner.

Residential property includes (but is not limited to):

  • Detached houses
  • Semi-detached houses
  • Rowhouse Units
  • Condomonium units

An excluded owner is defined as:

  • An individual that is a Canadian citizen or permanent resident
  • A Canadian Corporation that is publicly traded
  • A registered charity
  • A cooperative housing corporation
  • Municipalities, Indigenous governing bodies, governments
  • Trusts that are publicly traded
  • Certain public service bodies (e.g. universities).

If you meet any of the above criteria, you are an excluded owner and do not have any filing obligations. If you do not meet any of the above criteria, you must file the UHT return and assess yourself for the tax owing. The deadline to file for the 2022 tax year is May 1, 2023 (as April 30 falls on a Sunday this year).

Note: this means if you own residential real estate held by a private corporation, you are required to file the UHT return.

Exemptions to the tax

The Government of Canada has provided some exemptions to the UHT. If you fall within the exemptions listed below, you will not be liable for the tax, but you will still be required to file the UHT return.

1. Primary Residence
The principal residence of the individual, their spouse or common-law partner, or their child who is attending a designated institution (university) is not subject to the UHT.

2. Qualifying Occupancy
A qualifying individual must occupy the property for at least one month and a total of 180 days/6 months in a year. A qualifying individual is:

  • An arm’s length individual with a written rental agreement in place
  • A non-arm’s length individual with a written rental agreement in place, and the rent is not below fair rent for that property
  • An individual owner, their spouse or common-law partner, who is in Canada for work under a Canadian work permit, and who occupies the property for that purpose
  • An individual owner, their spouse or common-law partner, parent, or child who is a Canadian citizen or permanent resident.

3. Vacation Property
The property is located in an eligible area of Canada and used by the owner, their spouse or common-law partner for at least 28 days in a year. You can verify if the property is in an eligible area at the Government of Canada’s Website.

4. Specified Canadian Corporation
A corporation that does not have foreign shareholders (either other foreign corporations or individuals) that own 10% or more of the votes and value of the corporation.

5. Specified Canadian Partnership
Each partner of the partnership, on December 31, is an excluded owner or a specified Canadian corporation as described above.

6. Specified Canadian Trust
Each beneficiary that has a beneficial interest in the trust is an excluded owner or a Specified Canadian corporation, as mentioned above, on December 31.

7. New Owner
An owner when they first acquired the property during the year and did not own the same property at any time during the nine prior years.

8. Death of the Owner
The owner died in the current or prior year, the personal representative of the deceased owner who did not own the property in prior years, or a co-owner where the property was co-owned by the deceased that held at least 25% of the property.

9. Availability of the Property
UHT is not applied if the property is:

  • Under construction and not substantially completed
  • Construction is done after March, and the property is put for sale to the public
  • Not suitable to be lived in
  • Uninhabitable due to disaster or major renovations.

If you do not meet any of the exemptions in this listing, you will be charged UHT.

Calculation of the UHT

The UHT is calculated at the rate of 1% on the taxable value of the property, which is generally the greater of (a) its value as assessed by a government agency; and (b) the property’s most recent sale price on or before December 31 of the calendar year.

Alternatively, a person may elect to use the fair market value of the property at any time on or after January 1 of the calendar year and on or before April 30 of the following calendar year. The fair market value must be supported by a written appraisal and provided to the Canada Revenue Agency upon request.

Penalties

Be sure to file the UHT on time. If you do not file the UHT, the penalties are the GREATER of:

  • $5,000 for individual owners,
  • $10,000 for non-individual owners (corporations),
  • The total of:
    • 5% of your UHT payable for the residential property for the calendar year, and 
    • 3% of your UHT payable for the residential property for the calendar year, multiplied by the number of complete calendar months that the return is past due.

The penalties are in addition to any amounts owing from the UHT return and apply even if you do not owe any tax.

If you are still unsure about whether you need to file a UHT return (UHT-2900), or if you need any help filing your returns, contact us to book a meeting with our team.

Disclaimer: Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. This does not constitute legal advice. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.