Taxes and Real Estate in British Columbia:
This information was gathered with the best of my ability and although I consider it accurate at the time of its writing, the complexity of tax law is beyond my scope of expertise and is continually changing. One should always consult a legal or accounting tax professional for up to date and detailed information. www.samwyatt.com/links.php (accountants and lawyers).Types of Tax that affect real estate transactions in
Property Transfer Tax – PTT
Goods and Services Tax – GST
Income & Capital Gains Tax
Non-Resident Withholding Tax
Whenever you buy real estate in
1% on the first $200,000 and 2% on the remainder of the net purchase price (The price before any taxation).
You may also be eligible for an exemption of this tax if all of the following conditions are met:
- If you have never owned a principal residence anywhere in the world.
- The Purchase price is $400,000 or less. If the purchase price is equal to or less than $375,000 you do not have to pay any PTT. If the purchase price is between $375,000 and $400,000 you get a partial exemption on a sliding scale. The calculation is:
((400,000-purchase price) / 25,000) x (total PTT normally payable)=Exemption
Total PTT normally payable-Exemption= PTT Payable
Mortgage is 70% or greater
You are a Canadian Citizen or permanent resident for the past 12 months prior to completion.
You must reside in the home for at least one year. If you sell the home or cease to keep it as a primary residence prior to a period of one year elapsing you will have to pay back the exemption amount.
This tax is typically paid by the buyer at the time of completion through their lawyer or notary who will provide the necessary forms for an exemption should the purchaser be eligible.
The standard rate for GST is 6%. The Goods and Services Tax is payable to the Canada Revenue Agency (CRA) when purchasing any real estate in
- Newly constructed
- Substantially renovated
- Sold as an “interest in trade”
In general, GST is not payable on “re-sale” real estate and it is the Seller that is liable to the CRA for the payment of the GST. However, it is usually the buyer who actually pays the GST and in the case of a Non Resident Seller, it is the buyer who is liable to the CRA for any GST that is payable.
All newly constructed real estate requires the payment of GST. Sometimes the developer/owner includes the GST in the contract price but most of the time the GST is payable on top of the net purchase price. There is a rebate for GST if both of the following criteria are met:
- Owner Occupied.
- The net purchase price was $450,000 or less. If the purchase price is less than or equal to $350,000 then the rate for GST is 3.84%. If the purchase price is between $350,001 and $450,000 there is a sliding rebate calculated as follows:
((450,000-purchase price)/100,000) x 7650 = Rebate Amount.
There is also a rental property rebate for GST that is similar to the rebate for an owner occupier. The purchaser of new rental property may be eligible for this rebate but they will have to repay such rebate if they sell the property in less than a year from purchasing it.
GST is typically paid by the buyer at the time of completion through their lawyer or notary who will provide the necessary forms for a rebate should the purchaser be eligible.
According to the CRA web site a substantial renovation is:
"Substantial renovation of a residential complex means the renovation or alteration of a building to such an extent that all or substantially all (90% or more) of the building that existed immediately before the renovation or alteration was begun, other than the foundation, external walls, interior supporting walls, floors, roof and staircases, has been removed or replaced where, after completion of the renovation or alteration, the building is, or forms part of, a residential complex." (Ref: http://www.cra-arc.gc.ca/tax/business/topics/gst/glossary-e.html#renovation)
All of the rules that apply to new construction apply to a substantial renovation.
Interest in Trade:
Sometimes the CRA will deem a transaction of real estate an “interest in trade”. That is to say that the primary purpose of the real estate transaction was to make money. This is a tricky subject because the CRA looks at the intention of the Seller and/or purchaser (in the case of a rebate application) in a transaction to determine what the nature of the transaction was. If you are buying and selling property with the primary intention to make a profit, you are likely liable for GST at its full rate of 6%. Get good accounting and/or legal advice.
Capital Gains & Income Tax:
Real Estate is considered a capital asset and as such is generally subject to Capital Gains Tax upon disposition or upon a change of use (deemed disposition). One of the exceptions to this rule is if you sell your primary residence; in this case, normally, NO TAX IS PAYABLE.
Currently capital gains tax is effectively half of your normal income tax rate. This makes capital gains a very lucrative way to make money and there is the rub. If you buy real estate with the primary intent of making a profit from reselling the property, the profit may be considered income from an “interest in trade” and you may have to pay full income tax rates. The principle behind a lower Capital Gains tax than normal income tax is that through no intent of your own, the value of a long term asset increased and that you should not be penalized for this. In the present booming real estate market it is easy to see how one could make huge capital gains and as a result the CRA is looking very closely at recapturing some tax revenues from “flippers” who claim that their intent was to live in the property as a principal residence or rent it out but their circumstances changed. This is a legitimate and perfectly valid claim but it is crucial that one document their intent so that if they are audited they have some solid evidence with which to persuade the CRA.
Non-Resident Withholding Tax
Any gain on the disposition of real estate for non-residents is taxed in two stages. Withholding tax is levied at the time of disposition and the final tax is calculated by filing a personal tax return form T1 at year’s end.
Withholding tax is calculated at 25% of the interim gain on a sale (up to 44% of any Capital Cost Allowance claimed in previous year’s tax returns may apply as well). The interim gain is calculated by subtracting the original purchase price, PTT, GST and legal fees paid from the new sale price. Withholding tax is paid by filling a T2062 form and submitting the tax. Once the form is submitted and the tax is paid, a certificate of compliance is issued. This certificate is important. The purpose of withholding tax is to ensure that a non-resident does not remove the proceeds of a sale from the country without paying tax. To ensure this does not happen, in the case of a non-resident seller, the CRA assigns the liability to pay the tax onto the purchaser. It is important for anyone purchasing a property from a foreign non-resident seller to obtain a copy of the certificate of compliance or instruct their lawyer to hold back the necessary funds from the sale to pay the tax.
At year’s end the seller can file a T1 tax return and calculate the actual tax owed. Depending on the intent and use of the property the taxes on the proceeds of sale may be calculated as either a capital gain or at full income tax rates. In most cases filing this tax return will yield a recapture of some of the withholding tax paid.
Gross Rental Income is subject to a withholding tax of 25% and is due monthly to the CRA. A non-resident may also opt to file a T1 tax return to recapture their expenses but will then be subject to full income tax rates. They may also opt to file a form NR6 form is filled at the beginning of the tax year, in this case, only 25% of the NET rental income will be withheld but the owner MUST then file a T1 return at the end of the year. Depending on the exact circumstances any of the options above may be the most advantageous. See the following link to see some examples of the options available.
Property tax is the annual tax on the assessed value of a property and is typically payable biannually to the municipality in which the property is set. Property tax is a term used for a consolidated series of real property taxes that may include: Rural Tax, School Tax, General Tax, Hospital District Tax and Regional District Tax. The rate of taxation varies with the budgeted income tax revenue and the assessed value of property. First, the taxing authorities determine their needed tax revenues. Simplistically put, this total revenue requirement is then divided by the total value of all property in $1,000’s. This figure is the tax rate. In