Author: Edward Tse

Categories
Uncategorized

Budget 2024: New Capital Gain Inclusion Rate

Capital gains tax going up, everyone panic! Well it isn’t that simple and there is a lot of confusion from people not using the right terminology.

The headline news is that starting June 25th 2024, capital gains will be taxed higher after the initial $250,000 in capital gain per year for individuals. The first $250,000/year in capital gain will have a capital gain inclusion rate of 50%. After the first $250,000/year the capital gain inclusion rate on any additional capital gain will be 66.67% (or 2/3). Note that for corporations and trusts, the capital gain inclusion rate for any capital gain will be 66.67% and this is quite a big change for those that own rental properties or reinvest excess cash within corporations.

For those who aren’t familiar with tax terminology or are confused and misled about what you’ve seen on social media, read on. Note that while some of it sounds very wordy and repetitive, you need to pay attention because there is a very important difference between capital gain and taxable capital gain and how these terms are related.

Stay until the end for some tax planning opportunities and considerations! As with any new legislation like this I also highly recommend you read the release from the government on this topic and have another example calculation.

Let’s start with defining some terms:

Capital Gain – To simplify, it is the profit you make after selling a capital asset; proceeds of disposition minus the cost of the asset. For example, if you could a rental house for $100,000 and you sold it for $500,000. Your capital gain will be $400,000.

Capital Gain Inclusion Rate – Currently (until June 25th 2024), the only capital gain inclusion rate is 50%. This means that 50% of the capital gain is included as taxable income.

Taxable Capital Gain – This is the amount of the capital gain that is actually taxed at your marginal tax rate. Using the above example with a Capital Gain Inclusion Rate of 50%, the taxable capital gain is $200,000. Note that $200,000 is the taxable capital gain and you are NOT paying the CRA $200,000.

Marginal Tax Rate – Canada has a progressive tax system which means that the more you make, the higher your tax rate. The marginal tax rate is the tax rate a taxpayer pays on their next dollar of income given their income level. In Canada it’s slightly complicated because we have federal and provincial tax rates which increase based on different levels of income. This is why most generic examples of tax calculations just assume the highest marginal tax rate to make examples easier. For example, in Ontario, the highest marginal tax rate in the 2023 tax year was 53.53% which applies to taxpayers making over $236,675 in taxable income. Using our example numbers above, assuming the taxpayer makes over $236,675, the applicable marginal tax rate on the taxable capital gain is 53.53%. Therefore the tax that is paid on the capital gain of $400,000 is $107,060.

Capital Gain Tax (?) – So what exactly is a Capital Gain Tax? There is no special tax rate for capital gains. In the above example, the effective tax rate on the capital gain was 26.76% (107,060/400,000) but an individual making $80,000 with a lower marginal tax rate (approximately 29.65% vs 53.53%) will result in lower effective tax rate on the same capital gain.* So when people say “the Capital Gains Tax has gone up!”, it can be confusing and misleading because there really isn’t one capital gains tax rate. What’s really happening is that the capital gain inclusion rate is going up after the initial $250,000 of capital gain.

Capital Gain Calculation from June 25th 2024

I will now use the above example to show you how to calculate how the new capital gain inclusion rate works. Reminder: Bought $100,000 house, sold for $500,000. We will use the same marginal tax rate of 53.53% in Ontario

Under the new tax regime, the capital gain does not change, it is still $400,000. But the capital gain inclusion rate will be different which results in a different taxable capital gain.

The first $250,000 has a capital gain inclusion rate of 50% therefore adding $125,000 (250,000*50%) of taxable capital gain to the taxpayers income.

The remaining $150,000 (400,000-250,000) of capital gain has a capital gain inclusion rate of 66.67% therefore adding $100,000 of taxable capital gain to the taxpayers income. This means that the total taxable capital gain will be $225,000.

Next step is to multiply the taxable capital gain by our marginal tax rate of 53.53% resulting in a tax of $120,442.50 on the capital gain of $400,000. The result is that under the new system, the same transaction would be taxed an additional $13,382.50. If you want to boil it down, it is essentially a 16.67% tax increase on capital gains above $250,000/year for individuals and 16.67% tax increase on all capital gains for corporations and trusts.

Main Takeaways

Most people will not be affected by this because A) their main asset is their own home which is exempt from capital gains under the Principal Residence Exemption and B) if they are selling an investment/rental property, only gains above $250,000 will be affected.

The most affected will be on corporations and trusts which will see all their capital gains subject to the 66.67% capital gain inclusion rate.

Tax Planning Opportunities?

Here are some options for reducing your tax burden with the higher capital gain inclusion rate:

  • For real estate held in a corporation, it is worth rethinking why you are holding it in a corporation. If it is simply for limited liability, is it worth paying an additional 16.67% in taxes for capital gains in a future disposition? It might be worth taking the property out of the corporation to be held personally.
  • For professional corporations and other businesses that reinvest profits within a corporation to take advantage of tax deferral; this new change can have an impact on the cost-benefit analysis especially if you are generating a lot of capital gains within the corporation. It might be worth taking more dividends out of the corporation and investing personally. This is especially true if you are planning to liquidate holdings of the corporation in the next few years for retirement or sale of the business to take advantage of the Lifetime Capital Gain Exemption.
  • In the future, you would want to keep capital gains below $250,000/year to avoid the higher inclusion rate. For most people such a big gain would mainly be from the sale of an asset like an investment/rental property. Obviously, such a disposition is very difficult to split up into multiple transactions. But in the right circumstances, you could sell a percentage of the property each year to get below the $250,000 cap. You would obviously be incurring additional transaction fees and complications, especially if the property is mortgaged. But in the above example with a $400,000 capital gain, if you split the transaction over two years, you would save $13,382.50 in taxes.

Given the fact that the effective date of this new change is June 25th 2024, this does not give you much time to make substantial changes to your asset holdings so please reach out to us ASAP if you want a consultation.

FAQ

  • The new capital inclusion rate will apply to assets sold on or after June 25th 2024. For real estate this means that any Agreement of Purchase and Sale that becomes binding on or after June 25th 2024 will have the new capital gain inclusion rate. To avoid the new capital inclusion rate you would need to having an binding APS before June 25th 2024.
  • Corporations and Trusts will effectively be paying 16.67% (66.67%-50%) more in taxes on capital gains across the board because the new capital gain inclusion rate applies to any capital gain.
  • The principal residence exemption still applies.
  • The $250,000 threshold for individuals resets each tax year

*I have omitted calculating the effective tax rate as it is more difficult because the taxable capital gain will be taxed at different marginal tax rates as it pushes up the taxable income

Categories
Uncategorized

March 2023 PGWP Extension

On March 17th 2023, Canada’s Immigration Minister Sean Fraser announced that those with a Post-Graduation Work Permit (PGWP) expiring in 2023 will be able to apply for an Open Work Permit extension as of April 6th 2023.

The PGWP extension will also be available to those whose PGWP expired in 2022 and applied for an Open Work Permit extension last year.

April 6th 2023 is when eligible candidates will be able to apply for the extension. Those whose PGWP have already expired will also be able to apply but must also submit an application to restore their status.

Due to the high CRS draws for Express Entry, this will be a welcome relief for those who are hoping to gain additional years of work experience to improve their score. Some were hoping for a new TR to PR intake but unfortunately there is no news for that today.

Categories
Immigration Real Estate Tax

Underused Housing Tax Act – Who Needs to File?

Introduction

The Government of Canada has introduced the Underused Housing Tax Act (UHTA) which came into effect on January 1, 2022. The filing and payment obligations generally apply to non-resident non-Canadian owners residential property, but some Canadian owners are also subject to filing obligations.

The filing due date is April 30th of the next calendar year and note that this is an annual filing. Significant penalties are imposed for failing to file an annual return; minimum of $5,000 for individuals and $10,000 for corporations. It is worth repeating, these penalties are for failure to file the return; even if you think the property is not subject to the tax because it is occupied, you might still need to file.

The definition of “residential property” and “owner” are relatively straight forward and can be read about here. One area of this Act that can catch people off guard is the definition of “excluded owner” and “affected owner” which is what I want to focus on here because that will determine the filing obligations.

Excluded Owner

Since I am writing for individuals and small business owners, I will only address the excluded owner definitions most relevant to you (hopefully). For details check out the other links in this post or contact us directly.

Excluded owners do not have to file or pay any taxes under the Act.

Canadian citizens and permanent residents are excluded owners unless they are the owner of residential property as either:

  • a trustee of a trust (except if you are the personal representative of a deceased individual, in which case you are an excluded owner of the residential property)
  • a partner of a partnership

One important group that is not excluded are private corporation holding residential property. This means holding companies owning residential real estate (ie. for the purpose of asset protection, financing, etc), will be required to file even if they are ultimately not liable for any tax under the Act. This means that whether the private corporation is owned by Canadians or not, it must file a return.

Affected Owners

Affected owners, as the name implies, is everyone affected by the Act which means all affected owners must at least file a return, and may potentially be required to pay the Underused Housing Tax.

The CRA defines affected owners as everyone who is not an “excluded owner” in the definition above. Some important examples of affected owners include:

  • Individuals who are not citizens or permanent residents of Canada
  • Canadian citizens and PR who are either acting as a trustee (other than as a personal representative of a deceased individual) or as a partner of a partnership
    • Note that the immigration status of the beneficiary or partner is not relevant, the affected owner must still file if everyone involved is Canadian or PR.
  • Private corporations whether Canadian or not.

March 27th 2023 Update

On March 27th 2023, the CRA announced that they would provide administrative relief for the 2022 tax year. The due date for the 2022 tax year is still May 1st 2023 but no penalties or interest will apply for UHT returns and payments that the CRA receives by October 31st 2023.

Additional Resources

Categories
Uncategorized

Public Policy for Hong Kong Residents Update February 2023

On February 7th 2023, the IRCC Minister announced an extension of the public policy for Hong Kong residents and expanded the eligibility criteria.

The update extends the deadline to apply to February 7th 2025. Furthermore, the eligibility criteria has been expanded to include those who graduated from a post secondary institution in the 10 years preceding the date of submission of the open work permit application.

Interested applicants in this program should also be aware that the recent foreign buyer ban would not apply to Hong Kong residents who obtain an open work permit through this public policy program. This is because this open work permit is issued based on S25.2 of the Immigration and Refugee Protection Act which would exempt the holder of the work permit from the ban.

If you are interested in learning more about how to apply or how the foreign buyer ban may affect the work permit holder, please contact us.

Categories
Real Estate Tax

Anti-Flipping Measure Canada 2023

The new anti-flipping measure took effect in January 2023 and is another effort by the government to control real estate speculation in Canada, similar to the foreign buyer ban. If real estate is bought and sold within 365 days, the CRA deems the property to be “flipped property” and any profit from the transaction is treated as business income to the taxpayer. There are specific exemptions outlined below.

Background

The anti-flipping measure was put into place by Bill C-32 and amends the Income Tax Act (the “ITA“) to add a subsection specifically to deem proceeds from a “flipped property” as business income meaning 100% of the profit is included as income for the taxpayer. In the past, one of the advantages of transacting in real estate was that the profit could be treated as a capital gain and therefore only 50% of the profit would be taxed in the hands of the taxpayer.

Even before this anti-flipping measure, if a taxpayer flipped property, it would still generally be classified as business income. But taxpayers who did this in their personal capacity often reported any profits as a capital gain by justifying the real estate as an investment property and/or making use of the Principal Residence Exemption (more on that below). The new anti-flipping measure introduces a “bright-line rule” to prevent taxpayers from taking advantage of this grey area.

What is “Flipped Property”?

It is important to distinguish between the colloquial term we use everyday when we talk about “flipping property” and the CRA definition.

Colloquially, a simple definition of flipping property is the act of buying and selling a property quickly for profit.

In the anti-flipping measure, the CRA’s definition of “flipped property”: is any housing unit of a taxpayer that was owned for less than 365 consecutive days prior to the disposition of the property with several important exemptions. If the disposition occurred due to, or in anticipation of one or more of the following events, then it would not be considered flipped property:

  • death of a taxpayer or a person related to the taxpayer;
  • change in the taxpayer’s household in connection with a related person;
  • breakdown of a marriage or common-law partnership if the partners have been living separate and part for at least 90 days prior to disposition;
  • a threat to the personal safety of the taxpayer or a related person;
  • the taxpayer or a related person suffering from a serious illness or disability;
  • an eligible relocation (as defined in s248(1) of the ITA);
  • an involuntary termination of employment of the taxpayer or the taxpayer’s spouse or common-law partner;
  • the insolvency of the taxpayer; or
  • the destruction or expropriation of the property.

The CRA’s definition of “flipped property” tries to capture the colloquial definition while introducing a level of certainty by creating a strict cut off point (a “bright line”) of 365 days of ownership. While the cut off is somewhat arbitrary, it eliminates a lot of the grey area as the previous requirement was based on intent of the taxpayer.

The CRA also disallows any loss from a flipped property if it falls under this S12 deeming provision for flipped property. Note that if the property is inventory of the taxpayer (ie. in a business that purposely buys and flips property) the loss would not be denied. This new deeming provision is not meant to capture and “punish” a dedicated real estate flipping business as they already treat any profit as business income.

What about the Principal Residence Exemption?

The Principal Residence Exemption will not exempt the gain from a flipped property. Unless the taxpayer is selling due to one of the exemptions, even if the property they sell is their personal residence, the gain will not meet the Principal Residence Exemption because the proceeds are deemed business income due to this new anti-flipping measure. See paragraph 2.6 of Income Tax Folio S1-F3-C2 for a detailed explanation why.

Potential GST/HST Implications

The Excise Tax Act (the “ETA“) imposes an obligation to remit GST/HST on taxpayers who are considered a “builder” under the Act. A taxpayer can be considered a “builder” if they resell a newly constructed property (ie. buying and selling a pre-construction condo soon after closing) or sell a property in which they substantially renovated.

For taxpayers who have deemed flipped property business income and meet the builder definition of the ETA, they will be required to remit to the CRA GST/HST. This means that the transaction price of the property will be deemed to include GST/HST that the seller will need to remit to the CRA which will further erode the profit, if any, from a flipping transaction.

Tips

If a taxpayer is in the situation of selling within the 365 day ownership period due to one of the exemptions, they should retain documentation for proof. The taxpayer has the burden to prove to the CRA that an exemption applies if the taxpayer is audited. Furthermore, the taxpayer should consult with a tax professional to ensure that their situation and/or documentation is sufficient to meet the exemption. By consulting a professional and relying on their expertise, it also offers taxpayer a layer of protection as the taxpayer has done their due diligence.

The CRA implements several algorithmic tools to flag returns for audits. If a taxpayer has a history of claiming the Principal Residence Exemption frequently, it might flag their return for a questionnaire and potentially an audit. Note that the CRA can reassess a taxpayer’s T1 return up to three years after the original Notice of Assessment but if the CRA alleges fraud or misrepresentation, they can reassess further back. In these audits and reassessments the burden of proof is always on the taxpayer therefore it is vitally important to consult a tax professional as early as possible in the process. Whatever the taxpayer tells the CRA should be able to be corroborated or proven through documentation or third parties.

Taxpayers should keep in mind that even if a property is sold after the 365 holding period, the transaction might still be considered business income from a flip. The determination will be based on the facts of the situation.

The anti-flipping measure is coming at a difficult time for taxpayers. With the increase in interest rates and mortgage payments, some home owners may find themselves in a difficult position financially. If the home owner has owned the property for less than 365 days, they might be caught under this anti-flipping measure even if they do not think they are flipping property.

Categories
Real Estate Immigration

Canada’s Foreign Buyer Ban on Residential Property for 2023-2025

The Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act) will be a two year foreign buyer ban on certain types of Canadian residential properties.

**UPDATE**

The federal government released the Regulations with more details on exemptions and enforcements on December 21st 2022, this article has been updated to include those new details.

**March 28th 2023 UPDATE**

The regulations were amended on March 27th 2023. The foreign ownership percentage of a corporation or entity was changed from 3% to 10% to be considered a Non-Canadian entity. The exemption for work permit holders was also amended, the exemption now only requires that the work permit has 183 days or more validity as of the date of purchase and they have not purchased more than one residential property. Non-Canadians are also now allowed to purchase residential property if the purpose is for development and can also buy vacant land. The article below will be updated with these changes while noting the old regulations.

Key points of the foreign buyer ban:
  • It comes into force on January 1st 2023 but will not prohibit any agreements entered into prior to this date.
  • There are exemptions for some “Non-Canadians”.
    • Temporary residents who are studying at a designated learning institution and meet all the following: filed all required income tax returns in the five preceding tax years in which the purchase was made, physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made, purchase price does not exceed $500,000, and have not purchased any other residential property in Canada.
    • Temporary residents who hold a work permit or are otherwise authorized to work in Canada and meet all the following: they have 183 days or more remaining on their work permit on the date of purchase and they have not purchased any other residential property in Canada.*
    • Foreign nationals who are diplomats, consular staff and members of international organizations.
    • Temporary residents in Canada due to an exemption under section 25.2 of the Immigration and Refugee Protection Act (IRPA). This is a special exemption for those fleeing international crises (ie. war in Ukraine, Hong Kong residents public policy, etc.) and an immigration professional should be consulted to see if the buyer meets this exemption.
    • A refugee with a successful claim in accordance with subsection 99(3) or IRPA. Again, please consult with an immigration professional.
  • The ban only applies for some residential properties.
    • Does not apply to residential properties outside of census agglomerations or census metropolitan areas. This exemption is meant to exempt certain recreational properties (ie. cottages) that would otherwise be caught in the foreign buyer ban but it should be noted that some cottage areas are not excluded.
    • Does not apply to residential properties with four or more individual dwelling units (ie. quadplexes and more, or apartment buildings).
  • There are exemptions for some types of purchases
    • Acquisition due to death, divorce, separation or a gift.
    • Rental of a property to a tenant for the purpose of its occupation by the tenant.
    • Transfer under the terms of a trust that was created prior to January 1st 2023.
    • Transfer resulting from the exercise of a security interest or secured right by a secured creditor.
  • Consequences for any person who contravenes the foreign buyer ban is a $10,000 fine.
    • Furthermore, the non-Canadian can be ordered to sell the property bought in contravention of the ban and the most the non-Canadian purchaser can receive from the sale is the purchase price they paid for the property when they bought it.
How long does the foreign buyer ban last?

The Act comes into force on January 1st 2023 until December 31st 2024 and is meant to be a temporary measure to reduce foreign demand for Canadian real estate to alleviate the housing crisis in Canada.

The foreign buyer ban will not affect foreign buyers who have already entered into a binding agreement of purchase and sale prior to January 1st 2023. The ban also applies to buyers signing pre-construction APSs and assignees during the period of the ban.

Who is banned from buying?

The Act applies to “non-Canadians”. Section 2 of the Act defines “non-Canadian” to mean:

  • Individuals who are neither Canadian citizens, registered Indian, nor permanent residents of Canada.
  • Corporations incorporated outside Canada.
  • Corporations incorporated in Canada but controlled by foreign corporations or individuals who are not Canadian citizens nor permanent residents of Canada. The Regulations have a strict definition of control; direct or indirect ownership of shares representing 10% or more of the value of the equity or voting rights OR control in fact through ownership agreements, etc.
  • Other persons/entities to be defined in the Regulations.

Importantly, there are several exemptions to the foreign buyer ban outlined in subsection 4(2) of the Act:

  • Temporary residents within the meaning of the Immigration and Refugee Protection Act and meet the requirements in the Regulations, specifically:
    • Certain students in Canada who meet the following requirements:
      • Must be studying at a designated learning institution (a list which can be found here). There are some small private colleges that might not be on this list.
      • Filed all required income taxes in the preceding five years in which the purchase was made. Note that only required income taxes need to be filed, students who had no income or other filing requirements do not need to file those preceding year tax returns.
      • Physically present in Canada for a minimum of 244 days in each of the five years preceding the date of purchase. This means that the students needs to have been in Canada for at least five years to meet this requirement. The 244 days is meant to cover the typical school term.
      • The purchase price of the residential property does not exceed $500,000.
      • They have not purchased more than one residential property. The wording in the Regulations is not very clear but my interpretation is that the purchase must be their first residential property. Property owned outside Canada does not count based on the Regulations.
    • Certain workers in Canada who meet the following requirements.
      • Hold a work permit or are otherwise authorized to work in Canada. Some temporary residents in Canada do not need a work permit and they would still be eligible for this exemption.
      • Have 183 days or more of validity remaining on their work permit or work authorization on the date of purchase. The date of purchase being the closing date on the APS. This requirement was added in the March 27th amendment to the Regulations.
      • They have not purchased more than one residential property. Again, similar to the student exemption, my interpretation is that the purchase must be their first residential property and property owned outside Canada does not count.
  • Diplomats, consular staff, and members of international organizations.
  • Temporary residents in Canada under a visa provided under section 25.2 of the IRPA. This visa is provided for humanitarian and compassionate reasons and meant to exempt those fleeing international crises (ie. war in Ukraine, Hong Kong residents public policy, etc.). This is a very useful exemption as it means the buyer does not need to meet the other requirements for temporary resident students and workers above.
  • Refugees who have made a claim for refugee protection under subsection 99(3) of the IRPA and the claim has been found eligible.
  • Non-Canadian individuals who purchase with a spouse who is a Canadian citizen, permanent resident, registered Indian, a refugee, or a temporary resident who meets the student and worker exemptions above.
Types of Property Affected?

The foreign buyer ban applies to “residential property” under the Act, meaning:

  • Detached houses or similar buildings containing less than four dwelling units.
  • A part of a building that is intended to be owned apart from any other unit in the building (ie. semi-detached house, rowhouse, condominium unit).
  • Vacant land that is zoned for residential or mixed use located within a census agglomeration or a census metropolitan area (more on the definitions below).

The Regulations exclude property outside a census agglomeration (CA) or a census metropolitan area (CMA). A CA has a core population of at least 10,000 and a CMA has a total population of at least 100,000 of which 50,000 or more live in the core. This exclusion is meant to exclude recreational properties, mainly cottages, from the ban but some popular areas such as Squamish in BC and Collingwood, Wasaga Beach and Kawartha Lakes in Ontario are included. CA and CMAs can be confirmed here by filtering for CA/CMA.

What are the consequences?

Every person who contravenes OR helps contravene the foreign buyer ban will be guilty of an offence and liable to be fined up to $10,000. Real estate agents, lawyers, builders, and even sellers should be aware of the wide reaching implications of these penalties.

Section 7 of the Act also states that the court may order the property bought under the foreign buyer ban to be sold. The Regulations state that the order for sale can only be made; if the non-Canadian is still the owner when the order is made, notice has been given to every person who may be entitled to receive proceed from the sale, and the impact would not be disproportionate to the nature and gravity of the contravention.

More importantly the order will result in the non-Canadian receiving an amount not greater than the purchase price they paid for the residential property. Meaning that after repaying any court costs and Canadian co-owners or third parties (ie. mortgage, liens, other creditors, etc), any net gain is paid to the government. This is potentially a much bigger “fine” than the $10,000.00 for contravening the foreign buyer ban.

Conclusion

The two year foreign buyer ban along with the recent changes to the GST/HST on Assignments and Ontario’s expansion of the NRST is a continuing trend of government intervention to tackle the housing affordability crisis. Combined with the rising interest rate environment and the potential for a recession in the coming years, there will be a lot of uncertainty.

Notes

*Prior to March 28th 2023, the requirements were: worked full time (30hr/week) in Canada for a minimum three years within the four years preceding the year in which the purchase was made, filed required income tax returns for said years, and have not purchased any other residential property in Canada

Categories
Immigration Real Estate Tax

Ontario Non-resident Speculation Tax (NRST) 2023

The Ontario Non-Resident Speculation Tax (NRST) has gone through several changes throughout 2022. This article will summarize the changes as of the end of 2022 going into 2023.

Summary of NRST changes throughout 2022.

  • Before March 30th 2022, the tax rate was 15% and it applied to the “Greater Golden Horseshoe” area. NRST rebate available for foreign nationals who become PR within four years, student enrolled for at least two years from the date of purchase, or legal full time working in Ontario for one year from the date of purchase.
  • From March 30th 2022 to October 25th 2022, the tax rate increased to 20% and it applied province wide. Rebate ONLY available for foreign nationals who become PR within four years.
  • Since October 25th 2022, the tax rate increased to 25%.

If you want to read the Ontario government’s information on the Non-Resident Speculation Tax, this is their official website.

Who is liable for the NRST

The NRST applies to foreign entities and taxable trustees that purchase certain types of residential property located in Ontario.

There is a transitional provision that exempts property outside of the Greater Golden Horseshoe if the agreement of purchase and sale was entered into before March 30th 2022.

Foreign entities include individuals who are not Canadian citizens or permanent residents and foreign corporations. Taxable trustees are those who have at least one trustee who is a foreign entity or a beneficiary of the trust is a foreign entity.

Property subject to the NRST

The NRST applies to property that contains at least one, but less than seven, single family residences. Single family residences include detached houses, semi-detached houses, townhouses, and condominium units. This also includes duplexes, triplexes, fourplexes, fiveplexes, and sixplexes.

Therefore, buildings that contain seven or more single family residences (ie. rental apartments), commercial, vacant, and industrial land are excluded from the tax.

How the NRST is calculated and paid

The NRST rate is 25% of the value of the consideration for the residential property. In most cases, this will be the agreed upon sale price on the APS.

Again, transitional provisions apply to if the APS was entered into prior to the dates outlined above.

The NRST also applies to 100% of the value of the consideration even if the foreign entity only owns a portion of the property being purchased. Each purchaser is jointly and severally liable for any NRST payable.

The NRST will be paid as part of the lawyer closing process. The transferee will need to provide the lawyer with the NRST amount with the down payment of the property.

NRST Exemptions

The following NRST exemptions apply and they have not changed throughout 2022:

  • If the foreign national is a nominee of the Ontario Immigrant Nominee Program at the time of purchase and the property is used as the foreign national’s principal residence.
  • If the foreign national is a convention refugee under IRPA at the time of of purchase.
  • If the foreign national is jointly purchasing with a spouse who is a Canadian citizen, permanent resident, Ontario Immigrant Nominee Program nominee, or refugee.
NRST Rebates

If a foreign national bought a property after March 29th, 2022, the only rebate available is if the foreign national becomes a Canadian permanent resident within four years of the date of purchase. The date of purchase meaning the closing date of the property transaction when the transfer/deed is registered by the lawyer.

The requirements of the permanent resident rebate are as follows:

  • the foreign national must become a Canadian permanent resident within four years of the date of purchase,
  • the property must be owned only by the foreign national or by the foreign national with their spouse,
  • the property must be used as the foreign national’s principal residence for the entire period, and
  • the rebate application must be received by the Ontario Ministry of Finance within 90 days of the foreign national becoming a permanent resident of Canada.
NRST Rebate transitional provisions

Transitional provisions apply for the student and worker rebates if the APS was entered into prior to March 29th 2022 but the complete application must be submitted by the earlier of:

  • four years after the date of purchase, or
  • March 31st, 2025.
NRST Rebate Application Procedure

When we apply for the NRST rebate, we usually include it with any Land Transfer Tax (LTT) rebate for first time home buyers if applicable (see below for more details on timeline).

A complete rebate application should have the following:

  • Ontario Land Transfer Tax Refund/Rebate Affidavit
  • Registered transfer
  • APS, and/or assignment documents with all schedules attached.
  • Statement of Adjustment
  • Proof of payment of the LTT and NRST
  • Proof of occupancy as principal residence with 60 days of closing
  • Proof of status as permanent resident (or fulfilment of study or work requirements if applying for the transitional rebates)

In most cases, the applicant should have most of the documents required to submit the rebate application but if not, they should follow up with the lawyer they used for closing who will have the Transfer, statement of adjustment, Teraview docket summary, etc. Note that most lawyers will charge an additional legal for the rebate application process because it is not included in their original retainer.

Proof of occupancy could include utility, phone, credit card statements, delivery slips, moving invoice, etc. that support the use of the property as the foreign nationals principal residence throughout the ownership period. The government gives a grace period of 60 days but it is expected that the applicant must be able to prove they moved into the property within this time.

Proof of status for permanent resident status would be a PR card or the Confirmation of PR document.

For the transitional rebate provisions for students, a study permit, an official transcript showing full time study for two years after the date of purchase and invoices to show tuition payments is generally sufficient. A school letter confirming enrollment would also be advisable in some situations.

For the transitional rebate provision for workers, work permit, T4s, pay stubs, and an employer letter confirming employment is generally sufficient.

Other Considerations

If the foreign national is also a first-time home buyer, they may be eligible for the LTT rebate from Ontario and/or Toronto if applicable. The rebate only applies if the foreign national becomes a permanent resident and the deadline for application is more strict than the NRST. The deadline to apply for the LTT rebate for first time home buyers is within 18 months of the date of purchase.

It is very important to make sure these rebate applications are complete because processing time can take almost a full year. If an incomplete application is submitted, it could take months before the problem is detected and by that time, the time limits above could be exceeded. If you need help, please reach out to us.

To stay up to date on any future changes to the NRST or to stay up to date on global mobility issues, sign up to our newsletter using the form below.

Categories
Immigration

How to Work in Canada for UK Citizens

This article is specifically about the Working Holiday program available for UK citizens aged 18 to 30. To work in Canada for UK citizens, the Working Holiday program is the most obvious solution. It is a sub-program of the International Experience Canada (IEC) program. There are three programs under IEC but UK citizens are only eligible for Working Holiday.

Background

UK citizens can travel to Canada visa free and stay as a visitor for up to 6 months (before applying for an extension) but if you want to legally work and potentially stay in Canada as a permanent resident and citizen, the best way is to obtain Canadian work experience via a work permit.

Canada has many work permit categories; some are locked to specific employers who sponsor you, while others are “open work permits” that allow you to work for any employer in Canada. The Working Holiday Program provides a 24 month open work permit for eligible applicants.

Each year, IRCC sets a quota for the number of applicants that will be accepted under this program. IRCC will issue more invitations than the quota because it knows many applications will either expire or be rejected. The quota for 2022 is 8000 applicants from the UK. As of June 3rd 2022, 11,641 invitations have been issued but there are still 2,096 spots available.

Many people entered the pool and did not decided to proceed or had their application rejected. This is not surprising as the IEC profile is free to create so some people might create a profile who are not committed to coming to Canada. Unfortunately this does create delays for those who do not make it for the initial draw. In prior years, the UK quota was often filled so if you are interested, you should begin the application process ASAP.

Working Holiday Requirements

For UK citizens to participate, they must meet the following conditions:

  • be a UK Citizen
  • have a valid UK Passport (ideally valid for the full 24 months)
  • aged 18-30
  • have a minimum of $2500 CAD
  • have valid health insurance for the duration of their time in Canada
  • cannot be inadmissible to Canada
  • have a round trip ticket or demonstrate financial resources to purchase departure ticket
  • cannot be accompanied by dependants
  • pay all required fees (IEC application fee, open work permit holder fee, biometrics (if applicable)).
  • as of the writing of this article, IEC participants must all be fully vaccinated

If you are interested in participating in the Working Holiday Program, you can create an IEC profile which will put you in a pool with other candidates. IRCC periodically draws from the pool by issuing an Invitation to Apply (ITA).

Once you receive an ITA, you have 10 days to accept the invitation and from the day you accept the invitation, you have 20 days to apply online for a work permit. Note that an ITA does not mean you are eligible for a work permit, being issued an ITA means you can apply for the work permit. This is a very short and strict timeline, if it is not met, the invitation will expire and you will need to submit a new IEC profile and get drawn again and if the quota has been met, you’ll need to wait for next year.

To apply for the work permit you need to provide information and documents that match the information given in your IEC profile. Any discrepancies can result in delays in processing or a rejection of the application. This is why we only represent clients for Working Holiday Program applications when we submit the IEC profile and prepare the work permit application.

The work permit application will require the following documents:
  • Fill in online forms about your personal and family information, work and education history.
  • Medical exam by a panel physician only if you were in certain countries for 6 months or more or you plan to work in the health field, primary/secondary education, child care, or elderly care.
  • Police certificate for countries you’ve spent 6 months or more in a row since the age of 18.
  • CV/Resume
  • Scanned copy of passport and ID documents
  • Digital photo

Work permit application processing time as June 8th is 6 weeks but you can check the most recent estimate by IRCC here. If you have not submitted biometrics to IRCC before for a different application, you will need to do so. You will receive a request letter during the work permit application process to go to a Visa Application Centre (VAC) to provide biometrics.

Once your application is approved, you will receive a Port of Entry Letter which outlines the next steps for entering Canada. This is not your work permit, you will receive your work permit at the border when you enter Canada.

Documents to bring when entering Canada.
  • Passport (obviously)
  • POE Letter
  • Proof of financial support showing at least $2,500 CAD (ie bank account statement issued no more than 1 week before arrival to Canada)
  • Proof of health insurance covering medical care, hospitalization, repatriation for the entire length of the work permit duration.
  • Proof of return flight ticket or additional funds that can be used for a return flight.
  • Due to COVID restrictions, you need to upload proof of vaccination in the ArriveCAN app and it does not hurt to bring a paper copy of your vaccination record as well.
  • We also recommend you at least for electronic copies of all the documents you submitted as part of the work permit application incase the CBSA officer has additional questions.

If the CBSA officer is satisfied with your documents, they will issue you a work permit with a validity period of two years from the date of entry.

If immigrating to Canada as a permanent resident is in your plan, you should look carefully at the requirements for permanent resident programs. The most popular program for Working Holiday Program participants from the UK is probably the Canadian Experience Class through Express Entry. Just note that one of the main requirements to be eligible is skilled work experience in NOC 0, A, or B occupations. So if you want to get Canadian permanent residence you should plan to get a job that meets this skill level requirement.

What if I am not aged 18-30?

To work in Canada for UK citizens who are not 18-30, other work permit options are available under the Temporary Foreign Worker Program or International Mobility Program. Some work permit streams require employers to obtain a Labour Market Impact Assessment (LMIA) while others do not but it heavily depends on your occupation.

FAQ and Tips

UK citizens can only participate in the Working Holiday Program once. Note that for some countries, Canada has an agreement where a citizens of a certain country can participate in the Working Holiday Program or IEC more than once. Unfortunately, Canada and the UK do not have such an agreement therefore UK citizens can only participate in the Working Holiday Program once.

You can apply for the Working Holiday Program work permit while in Canada but you will need to go to a Port of Entry to activate the work permit. You can also apply from another country that is not the UK.

You must receive an ITA before you turn 31. Once approved your work permit will still be valid for 24 months.

You have one year from the date of the POE letter to come to Canada to activate the Work Holiday Program work permit.

Categories
Immigration

Open Work Permit vs. Employer Specific Work Permit

One way to categorize Canada’s work permit system is by whether the work permit is an open work permit or an employer specific work permit. Of course, there are many types of work permits but in this article we will look at the difference between open and employer specific work permits.

Employer specific work permits are locked to specific employers who sponsor you. If you change jobs, you will need to have your new employer sponsor you for a new work permit as the old work permit is no longer valid.

Open work permits are only issued in Canada as part of specific programs to address public policies that the Government of Canada wants to achieve.

Some Examples of Open Work Permits:
  • The spouses of certain work permit or study permit holders may be eligible for an open work permit to facilitate family reunification.
  • A post graduate work permit (an open work permit) is issued for graduates of post-secondary education to allow them to gain work experience in Canada and have a path to permanent residence so Canada can retain skilled workers.
  • The Working Holiday program allows young people from participating countries to come to Canada to work. This program is open to countries who have a reciprocal program allowing Canadians to work in the partner country therefore it is seen as mutually beneficial.
  • There are other exceptional situations where an open work permit might be granted for reasons of hardship and humanitarian reasons.

Essentially, the Government wants to protect the labour market of Canada therefore foreign workers are generally issued an employer specific work permit. An open work permit is an exception to further public policy objectives.

Categories
Tax Real Estate

2022 Changes to GST/HST on Assignments

The 2022 Federal budget included a few changes to the way some real estate transactions are taxed. The two mains changes are the new residential property flipping rule and changes to the way GST/HST on assignments is taxed for individual. In this post I will be discussing the latter.

Summary of the changes to GST/HST on assignments effective May 7th 2022:

  1. The new change makes it so that there is GST/HST on assignments regardless of original intentions. Previously, if the original intention of entering the pre-construction contract/Agreement of Purchase and Sale (APS) was for personal use, GST/HST on assignments did not apply. But if the intention was to sell for profit or flip the property, GST/HST applied.
  2. The legislation officially recognizes that GST/HST is not payable on the portion of the consideration exchanged that represents the deposit that the assignor paid to the seller/builder.

I have seen people talk about these changes as if it will slow down the housing market because they seem to incorrectly assume that GST/HST on assignments is double levied or increased. The changes actually add certainty to the way GST/HST on assignments are taxed.

Let’s do an example of pre- and post- May 7th 2022 changes. Here is the assignment details (closely maps on to OREA Form 145/150 Schedule B):

  • Purchase Price on the original APS = $1,000,000
  • Payment by Assignee to Assignor for this Assignment Agreement = $100,000*
  • Total Purchase Price including the Original APS and this Assignment Agreement: $1,100,000
  • Deposit paid by the Assignor to the seller under the original APS to be paid by the Assignee to the Assignor: $200,000

**For the sake of simplicity, this excludes GST/HST but in practice, most assignment agreements will stipulate that GST/HST is included

Under the pre-May 7th 2022 rules according to the CRA*, GST/HST would have been payable on the whole amount that the assignee pays to the assignor, $300,000, which results in HST payable of $39,000 in Ontario (13%*300,000).

*Note that it was the CRA’s view that GST/HST is levied on the deposit. In reality this was challenged successfully in a 2013 Tax Court case and a taxpayer can file their GST/HST return without including the amount attributable to the deposit. But the CRA continued to levy GST/HST on the deposit amount in audits and reassessments so taxpayers unaware of the Tax Court ruling would end up paying additional GST/HST.

Under the post-May 7th 2022 rules, GST/HST on assignments is officially only payable on the payment by the assignee to the assignor, $100,000, which results in HST payable of $13,000 in Ontario. This will force the CRA to update their practice guidelines and hopefully they will no longer expect GST/HST on deposits in audits and reassessments.

The Nitty-Gritty

Lately, I have seen a lot of incorrect information shared by investors, agents, accountants, and lawyers regarding the new GST/HST changes so I hope that this post can put to rest any uncertainty on this issue by giving concrete examples and referring to the budget documents (the link goes to the Supplementary Information attached to the Federal Budget).

Many people are confused about the new changes to GST/HST on assignments and I think it largely stems from the imprecise use of language when talking about assignment agreements.

Before we begin, let’s start with some general definitions I will use in this post and are relevant in assignments:

  • APS = Agreement of Purchase of Sale = Pre-Construction Contract
  • Buyer = Assignor. The buyer is the individual who signed APS to buy the property. They will also be the assignor in the assignment agreement by assigning the APS to the assignee.
  • Seller = Builder. The seller is the builder who signed the APS to sell the property. Note that most pre-construction agreements have a clause that give the seller some rights in an assignment of the contract (ie. seek seller permission and/or an assignment fee).
  • Assignee = first occupant. The assignee is the person who will be assigned the APS and wants to eventually close on the property and live in it therefore, in most cases, they will be the first occupant.
  • Taxable Supply – means a supply that is made in the course of a commercial activity (from the Excise Tax Act (the “ETA“) S123(1))
  • Budget Day – April 7th 2022.

There are two main paragraphs most relevant to the new changes and I will explain what both of them mean. The first:

Budget 2022 proposes to amend the Excise Tax Act to make all assignment sales in respect of newly constructed or substantially renovated residential housing taxable for GST/HST purposes. As a result, the GST/HST would apply to the total amount paid for a new home by its first occupant and there would be greater certainty regarding the GST/HST treatment of assignment sales.

Supplementary Information for the 2022 Federal Budget (https://budget.gc.ca/2022/report-rapport/tm-mf-en.html#a5_2)

I believe some people have misinterpreted this paragraph, specifically the underlined section. The total amount paid by the first occupant is the purchase price on the APS (net of GST/HST as it is usually included in the price) plus the amount the first occupant/assignee paid for the assignment contract (also net of GST/HST).

The legislators have reframed the GST/HST on assignment sales from a taxable supply provided by the assignor, to the GST/HST owed because that is the “true purchase price” that the first occupant paid for the property. There is no double taxation. The amount of GST/HST on assignments is just being levied on the original APS price plus the additional amount the assignee paid to the assignor.

Which leads to the next paragraph:

Typically, the consideration for an assignment sale includes an amount attributable to a deposit that had previously been paid to the builder by the assignor. Since the deposit would already be subject to GST/HST when applied by the builder to the purchase price on closing, Budget 2022 proposes that the amount attributable to the deposit be excluded from the consideration for a taxable assignment sale.

Supplementary Information for the 2022 Federal Budget (https://budget.gc.ca/2022/report-rapport/tm-mf-en.html#a5_2)

The GST/HST on the deposit never made sense because the assignee was essentially returning the deposit that the assignor already paid to the builder which was already subject to GST/HST in the APS. This new reframing of the assignment sale solves that quirk because the deposit is already accounted for in the assignee’s “true purchase price”.

The Nittier-Grittier

So this is where going to law school comes in handy. If the above has not convinced you, please read on but otherwise, this might be a bit dense as I convert each part of the change to the ETA in everyday language that even a non-tax lawyer can understand (hopefully).

Supplementary Information for the 2022 Budget (https://budget.gc.ca/2022/report-rapport/nwmm-amvm-02-en.html)

If a taxable supply by way of sale of a single unit residential complex (as defined in subsection 254(1)) or of a residential condominium unit is made in Canada under an agreement of purchase and sale (in this section referred to as the “purchase agreement”) entered into with a builder of the single unit residential complex or of the residential condominium unit […]

Translation/simplification: If a taxable supply by way of an APS is entered into …

[…]and if another supply by way of assignment of the purchase agreement is made by a person (other than the builder) under another agreement, then the following rules apply for the purposes of this Part:

Translation/simplification: …and if there is another supply (profit from the assignment) by way of the assignment of the APS, then the following rules apply:

(a)  the other supply is deemed to be a taxable supply, by way of sale, of real property that is an interest in the single unit residential complex or residential condominium unit; and

They key phrase here is “other supply” because it does not refer to the original taxable supply which would have been the entire purchase price of the property in the APS. Instead, the “other supply” refers to the profit the assignor made in assigning the APS to the assignee.

Translation/simplification: (a) the profit from the assignment agreement is deemed to be a taxable supply.

(b)  the consideration for the other supply is deemed to be equal to the amount determined by the formula A-B where

Translation/simplification: (b) the profit from the assignment agreement is determined by the following formula A-B where

A is the consideration for the other supply as otherwise determined for the purposes of this Part, and

Translation/simplification: A is the total amount the assignor received before HST, and

B is

(i)  if the other agreement indicates in writing that a part of the consideration for the other supply is attributable to the reimbursement of a deposit paid under the purchase agreement, the part of the consideration for the other supply, as otherwise determined for the purposes of this Part, that is solely attributable to the reimbursement of the deposit paid under the purchase agreement, and

(ii)  in any other case, zero.

Translation/simplification: B is a reimbursement from the assignee to the assignor for the deposit paid in the APS if applicable

And putting it all together:

If a taxable supply by way of an APS is entered into and if there is another supply (profit from the assignment) by way of the assignment of the APS, then the following rules apply

(a) the profit from the assignment agreement is deemed to be a taxable supply.

(b) the profit from the assignment agreement is determined by the following formula A-B where

  • A is the total amount the assignor received before HST, and
  • B is a reimbursement from the assignee to the assignor for the deposit paid in the preconstruction agreement if applicable

Conclusion

This new change introduces more certainty and logic into the tax code which is good for society overall.

Realistically, this only disadvantages those who have a change in circumstance and are “forced” to assign their property before closing. For example, this could be due to interest rate hikes that prevent a taxpayer from obtaining a mortgage or getting a new job elsewhere and no longer needing the property.

But it does create a positive incentive for real estate flippers to follow the law as it closes off one of the avenues for avoiding GST/HST on assignments (though income tax is a whole other issue). I don’t think it will have any meaningful effect on house prices, unless people believe in the incorrect information.