1. Is stamp duty, transfer tax or a similar tax payable on the direct sale, purchase or leasing of real estate? If so, what are the rates and who is required to pay the duty or tax?

Yes.  A property transfer tax or title transfer fee will be levied by provinces and municipalities on the transfer of real estate through sale, purchase or lease.

Whether or not there is a property transfer tax or title transfer fee depends on the province.  Alberta, Newfoundland and Labrador, Northwest Territories, Nunavut, Saskatchewan and Yukon all impose a title transfer fee on registrations of title.  All other provinces impose a property transfer tax. Some Canadian municipalities, such as the City of Toronto, also impose a property transfer tax.

The amount of the property transfer tax or title transfer fee will depend on where in Canada the property to be sold, purchased or leased is located.  For example, for properties in British Columbia that are sold, or leased for a period of more than 30 years, the rate of property transfer tax is a sum as follows:

• 1% of the fair market value up to and including $200,000;
• 2% of the fair market value greater than $200,000 and up to and including $2,000,000;
• 3% of the fair market value greater than $2,000,000;
• If the property has residential property worth over $3,000,000, a further 2% tax will be applied to the residential property value greater than $3,000,000 (subject to exemptions);
• Additional 20% on foreign entities purchasing residential property in the Metro Vancouver Regional District and other prescribed areas of British Columbia.

Conversely, in Alberta, there is a land titles registration levy on the purchase of property, the rate of which, as of October 2024, is:

• CA$50 base + CA$5.00 for every CA$5,000 of the property fair market value; and
• CA$50 base + CA$5.00 for every CA$5,000 of the principal mortgage amount, if applicable.

The Prohibition on the Purchase of Residential Property by Non-Canadians Act (Canada) came into effect on January 1, 2023 and prohibits non-Canadians from purchasing Canadian residential property, subject to certain exceptions.  Excepted non-Canadians who purchase property in Ontario or British Columbia are subject to special provincial tax rules. Under the Land Transfer Tax Act (Ontario) and the Property Transfer Tax Act (British Columbia), an additional tax (often referred to as a foreign buyer’s tax) is imposed on qualifying foreign entities and trustees who purchase property within Ontario, or in designated regions of British Columbia, respectively. In Ontario for example, this additional tax is set at 25% for properties purchased after October 24, 2022 and is applied in addition to the general land transfer tax.

2. Is stamp duty, transfer tax or a similar tax payable on the indirect sale or purchase of real estate, e.g. by means of the sale of an SPV which holds real estate in the jurisdiction? If so, what are the rates and who is required to pay the duty or tax?

Generally, a disposition of beneficial ownership of Canadian real estate will be subject to land transfer tax.  As noted above, the applicable land transfer tax rate will depend on the part of Canada in which the property is located. In Ontario, transfer tax is payable on a disposition of beneficial interest in land which occurs on the sale, transfer, assignment or any other change in entitlement to the beneficial ownership of such land. The purchaser or transferee of a beneficial interest of land will be responsible for any transfer tax payable in Ontario.

3. Is value added tax, goods and services tax or a similar tax payable on the sale or purchase of real estate, and the letting of real estate? If so, what are the rates and who is required to pay the tax?

In Canada, there are five (5) different indirect tax regimes: the goods and services/harmonized sales tax (GST/HST), the Québec Sales Tax (QST), the British Columbia Provincial Sales Tax (BC-PST), the Manitoba Retail Sales Tax (MB-RST), and the Saskatchewan Provincial Sales Tax (SK-PST). Among these, GST/HST and QST operate as value-added tax regimes, while BC-PST, MB-RST, and SK-PST function as retail sales tax regimes.

GST is uniformly applied at a rate of 5% across all provinces and territories. Additionally, HST is applicable in Ontario at 8%, and at a rate of 10% in New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. QST is levied in Québec at a rate of 9.975%, BC-PST in British Columbia at 7%, MB-RST in Manitoba at 7%, and SK-PST in Saskatchewan at 6%.

Generally, under both the GST/HST and QST regimes, the supply by way of sale or by way of lease, licence or similar arrangement of real property is a taxable supply, unless it qualifies as an exempt supply. Most supplies of commercial and industrial real property as well as short-term rentals such as hotels and Airbnb are taxable supplies subject to GST/HST and/or QST.

Exempt supplies are those for which GST/HST and/or QST are not payable. Several exempting provisions apply to supplies of real property involving residential real property, such as the sale of used residential properties, long-term rentals, and certain supplies made by individuals.

Normally, GST/HST and QST are payable by the recipient (i.e. purchaser) of the supply to the supplier (i.e. vendor). However, an exception exists where the recipient is registered for GST/HST and/or QST purposes, obligating the recipient to self-assess the applicable GST/HST and/or QST with respect to a taxable supply by way of sale of a real property and remit them directly to the relevant tax authority (Canada Revenue Agency or Revenu Québec). It is important to note that a supplier might have an obligation to register for GST/HST and/or QST purposes, even if it is a non-resident of Canada and/or Québec.

Specific rules also apply for real estate developers who construct residential properties.

Unlike the GST/HST and QST, the supply of real property, whether made through sale or lease, is generally not subject to the BC-PST, MB-RST, and SK-PST.

4. Are there any annual taxes that may be payable on the ownership of real estate, e.g., annual land tax, municipal taxes, surtaxes, etc.?

A property tax is payable on the ownership of property in Canada and is administered by municipalities based on their individual tax revenue needs.  Rates therefore vary according to the location of the property in a particular municipality.  Property tax rates are calculated with reference to the assessed current value of the property and the municipal property tax rate.  In the City of Toronto for example, property tax rates comprise a city tax rate, education tax rate and a city building fund rate. 

At the time of publication, the total aggregate tax rate is:

• City of Toronto: 0.715289% for residential properties and 2.228677% for commercial properties; and
• City of Calgary: 0.64861% for residential properties and 2.19922% for non-residential.

The federal government has also introduced the Underused Housing Tax (UHT) effective January 1, 2022. The UHT is an annual federal 1% tax on the ownership of vacant or underused housing in Canada, and the tax generally applies to foreign owners of housing in Canada (although some Canadian owners may also be affected). Similar taxes have been introduced at various provincial and/or municipal levels, such as in British Columbia and the City of Toronto. The rules for each jurisdiction vary and property owners must determine if they are affected by each of these taxes separately. Property owners may have to comply with annual filing requirements even if exempt from the UHT or similar tax.

5. What is the tax rate imposed on rental income?

Rental income is included in a taxpayer’s income if it is derived from the renting of homes, apartments, rooms, office space and other real or immovable property.  The rate of tax will depend on the Canadian residency status and nature of the taxpayer (i.e., whether it is an individual, trust, corporation, etc., the nature of the income earned(as discussed below) and the taxpayer’s income tax bracket and province of residence. For example, the combined federal and provincial graduated income tax rate for individuals ranges between 20.05% and 53.53% for residents of Ontario (for example).  The basic federal tax rate for corporate taxable income is 38%, which can be reduced subject to certain requirements.

The rate of tax will also depend on whether the rental income is considered active business income (ABI) or investment income from property.  These two classifications attract different tax treatments.  For example, a taxpayer that earns ABI may be entitled to a small business deduction under Canadian tax law, which includes a lower tax rate on the first CA$500,000 of income.

Non-residents that receive Canadian rental income can elect to be taxed on their net rental income instead of paying a 25 percent withholding tax (subject to reduction under an applicable double tax treaty) under Part XIII of the Income Tax Act (Canada) (the ITA) on their gross rental income.  This is referred to as a section 216 election (in reference to section 216 of the ITA).  This will allow non-residents to benefit from allowable deductions from their gross rental income, such as capital cost allowances and interest deductions. 

6. Is interest on borrowings used to acquire real estate deductible for tax purposes against rental income? If so: (i) are there any restrictions, such as thin capitalization, transfer pricing or interest limitation rules; and (ii) is there any withholding tax on interest?

Yes.  Interest is generally deductible as long as it relates to an income-earning purpose, (such as earning rental income), and is based on a reasonable rate of interest.

There are thin capitalization rules that can affect interest deductibility.  Generally, these rules limit the debt to equity ratio for Canadian subsidiaries of foreign entities to 1.5:1.  The denied interest amount is deemed to have been paid or credited to the applicable “specified non-resident shareholder” immediately prior to the end of the taxation year of the debtor whether or not it is actually paid.  Such amount is then deemed to have been paid as a dividend and not as interest to the “specified non-resident shareholder” and accordingly subject to withholding tax. A “specified non-resident shareholder” is generally (i) a non-resident person who (alone or together with non-arm’s length persons) owns shares of the debtor that represent 25% or more of the voting shares or of the fair market value of all of the shares of the debtor, or (ii) a non-resident person that does not deal at arm’s length with such a person.  The thin capitalization rules essentially require a Canadian subsidiary to be financed with at least 40% equity rather than solely debt.

Transfer pricing rules, discussed further below, can also apply to limit interest deductibility. 

There is generally no withholding tax on the payment of interest to arm’s length foreign entities, unless such interest is “participating debt interest”.  However, where the parties are not arm’s length, there is a 25% withholding tax on interest (subject to reduction under an applicable double tax treaty). 

7. Are deductions for capital expenditure available against rental income for tax purposes, for example capital allowances or deductions for depreciation?  If so, are there separate allocations between land and building?

Capital cost allowance (CCA) amortizes the cost of capital property over time. CCA is a permissive deduction that, based on the maximum rate allowed depending on the type of property, allows a taxpayer with a deduction from taxable income.

Land is non-depreciable property that is not subject to CCA. Buildings are generally subject to CCA in the amount of 4% to 10%.

8. Are there any other material restrictions on the costs and expenses which may be deducted in calculating a person's taxable rental income, e.g. transfer pricing or anti-hybrid rules? 

Canada’s Transfer Pricing Regime

Transfer pricing rules may impose restrictions on rental income charged and expenses deducted. The Canadian transfer pricing regime generally conforms to the Organisation for Economic Co-operation and Development standards, requiring that transactions between non-arm’s length entities should occur under arm’s length terms and conditions. Where a transaction is not made on arm’s length terms or conditions, the ITA permits the CRA to impose a transfer pricing adjustment. A transfer pricing adjustment can also be made in respect of a transaction that would not have been entered into at all by arm’s length parties if it can reasonably be considered that the transaction was not entered into primarily for non-tax purposes.

Canadian taxpayers are required to maintain contemporaneous documentation in respect of transactions subject to the transfer pricing rules.

Excessive interest and financing expenses limitation (EIFEL) Rules

The EIFEL rules, first announced in the 2021 Federal Budget and which have yet to be enacted into law, are proposed legislation which will generally operate to limit a taxpayer’s deductions for “interest and financing expenses” (IFEs) to 30% of “adjusted taxable income” for taxation years beginning on or after January 1, 2024 (40% for taxation years beginning on or after October 1, 2023 and before 2024). Where certain conditions are met, a Canadian group member that is a member of an accounting consolidated group can elect for a “group ratio” to apply instead of the 30% fixed ratio (or 40% for the transitional year).  “Adjusted taxable income” is calculated on a basis similar to earnings before interest, taxes, depreciation and amortization, also known as EBITDA.  IFEs that are denied under these rules can be carried forward and deducted in a future taxation year indefinitely. IFEs can be offset by interest and financing revenues (IFRs), which generally include amounts received as payments of interest, and other sources of deemed interest income. Generally, the EIFEL rules will not apply to a Canadian resident corporation in a taxation year if its total net IFEs (i.e., IFEs less IFRs) is less than CA$1 million in the particular year.

Hybrid Mismatch Rules

The hybrid mismatch rules were first announced in the 2021 Federal Budget, with draft legislation released on April 29, 2022. The hybrid mismatch rules apply retroactively to payments arising on or after July 1, 2022.

These rules are intended to implement the recommendations in, and be generally consistent with, the report under Action 2 of the Group of 20 and Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Project (the BEPS Action 2 Report), titled Final Report on Neutralising the Effects of Hybrid Mismatch Arrangements.

“Hybrid mismatch arrangements” are cross-border arrangements that exploit differences in the income tax treatment of business entities or financial instruments under the laws of two or more countries to produce mismatches in tax results (referred to as 'hybrid mismatches').

Consistent with the recommendations in the BEPS Action 2 Report, the Canadian hybrid mismatch rules eliminate hybrid mismatches and align the tax results in Canada and the other relevant country in respect of a mismatch, by restricting the amount deductible by a taxpayer in respect of a payment under a hybrid mismatch arrangement or including an amount in the income of a taxpayer who receives such a payment, as applicable.

The proposed legislation addresses deduction/non-inclusion mismatches that arise from payments where the mismatch is attributable to the terms of the instrument.

Denial of Non-Compliant Short-Term Rental Expense Deductions

On June 20, 2024 new legislation was passed, effective January 1, 2024, that denies income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals and for short-term rentals where operators are not compliant with the applicable provincial or municipal licensing, permitting, or registration requirements. Short-term rental is defined in the new rules to refer to a residential property that is offered for rent for a period of less than 90 consecutive days.

9. Are there any restrictions on the use, and/or the carry forward, of losses?

Yes, there are carry-forward restrictions on the use of losses in Canada.  The general rule is that a taxpayer can carry forward a non-capital (or operating) loss, arising in tax years ending after 2005, back three years and forward 20 years.

For net capital losses, the general rule is that a taxpayer can carry those back three years and forward indefinitely.

There are also restrictions on claiming losses when there is an acquisition of control of a corporation.  In general, operating losses of the corporation can potentially still be utilized by the buyer, provided that a same or similar business is carried on with a reasonable expectation of profit throughout the particular taxation year by the corporation.  However, net capital losses cannot be carried forward after an acquisition of control.

10. Are capital gains arising on the direct sale of real estate taxable? If so, what are the rates and are there any exemptions?

Yes, gains arising on the sale of real property in Canada are generally taxable. Where the property is held as capital property, 50% to 66 2/3% of the gain is a taxable capital gain and is included in income. Specifically, as of June 25, 2024, the capital gains inclusion rate increased from one half (50%) to two thirds (66 2/3%) for corporations and trusts. The rate for individuals (including capital gains realized indirectly through a partnership or trust) remains 50% for the first $250,000 of capital gains in a taxation year. Capital gains realized by individuals in excess of $250,000, net of the amounts listed above, will be subject to the 66 2/3% inclusion rate. Some of Canada’s tax treaties have a “business property exemption” exempting the taxation of the sale of real estate in Canada that is considered to be property in which the business of the company, partnership or trust, as applicable, was carried on.

The rate of tax imposed on the portion of a capital gain arising from the sale of the real property that is included in the vendor’s income will depend on the nature of the taxpayer (individual, trust, corporation or partnership). There is a “principal residence” exemption available to individuals who dispose of real property that qualify for the exemption.  This exemption allows an individual to shelter part or all of the capital gain that would otherwise be taxable upon a sale or disposition.  In order to qualify for the exemption, the taxpayer must be a resident of Canada and the property must be ordinarily inhabited by the taxpayer or by his or her spouse or common-law partner, former spouse or common-law partner, or child. This exemption is available to non-residents of Canada in certain circumstances.

In 2023, a new deeming rule for residential real estate (including rental property) came into force. Subject to certain exceptions, a housing unit that was owned by a taxpayer for less than 365 consecutive days prior to the disposition is deemed to be a “flipped property”. The profit from the disposition of a flipped property is fully taxable as business income and does not qualify for the 50% capital gains inclusion rate or the principal residence exemption. Any losses resulting from the sale of a flipped property is deemed to be nil.

11. Are capital gains arising on the indirect sale of real estate taxable, e.g. by means of the sale of an SPV which holds real estate in the jurisdiction? If so, what are the rates and are there any exemptions?

Generally, under Canada’s tax treaties, non-residents are not subject to Canadian income tax on capital gains when they dispose of property, unless the capital gains are realized on a disposition of “taxable Canadian property” (TCP).

Taxable capital gains arising on the disposition of any TCP by a non-resident of Canada are taxable. TCP includes, among other things, both real or immovable property situated in Canada as well as shares of a corporation (other than shares listed on a designated stock exchange), partnership units or interests in a trust (other than a mutual fund trust) if, at any time during the 60-month period preceding the disposition, the shares, units, or interests, as applicable, derived more than 50% of their fair market value from Canadian real property, Canadian resource property or timber resource property (including options, interests or rights therein).

For shares listed on a designated stock exchange and mutual fund trusts, in addition to the foregoing test, the non-resident (together with certain non-arm’s length parties) must own 25% or more of the issued shares of any class of the corporation or units of the mutual fund trust, as the case may be.

Accordingly, as with direct sales of real estate, generally 50% (based on the current rules) of the gain arising from the sale of shares of a corporation will be taxable. Where the shares are held as capital property, 50% (based on the current rules) of the gain is a taxable capital gain and is included in income though the rate of tax will depend on the nature of the taxpayer (individual, trust, corporation or partnership). The “principal residence” exemption is not accessible to a taxpayer indirectly disposing of real property where there is no disposition of beneficial interest in the real property.

12. Is there a withholding tax on rental income?

For non-residents, there is a 25% withholding tax rate on rental income, subject to reduction under an applicable double tax treaty.

13. Is there a withholding tax on capital gains derived from real estate?  If so, does the withholding tax apply to both direct and indirect sales, or to direct sales only?

For non-residents, there is a 25% withholding tax rate on any taxable capital gains derived from the disposition of TCP. Under section 116 of the ITA non-resident vendors of TCP generally must notify the CRA (subject to certain exemptions) in respect of the disposition and to pay security for the withholding tax as prescribed in order to receive a compliance certificate for the disposition. The purchaser is obligated to withhold 25% of the purchase price where a compliance certificate has not been obtained by the non-resident vendor. The section 116 regime of the ITA is complex and you should consult a Canadian tax advisor if you are a non-resident disposing of TCP in Canada.

14. Does the jurisdiction have a REIT regime?   If so, please outline the tax treatment of the REIT and the main conditions that must be satisfied to enter and remain within the regime.  

Yes, Canada has a REIT regime. A REIT is a trust in which the investments of several investors are pooled together to invest in real property.  In addition to investing in income-producing properties, REITs may also buy, develop, manage and sell a wide variety of real estate assets.  If properly structured and operated, a REIT generally flows income earned from the real property through to the unit holders without trust-level income or taxes.  Each investor of a REIT will have an undivided beneficial interest in the trust’s income and losses.

A trust is a REIT in a taxation year if it is a publicly-traded unit trust resident in Canada throughout the year that meets a number of other conditions set out in the ITA relating to the types of properties held and revenue earned by the trust, including a requirement that 90% of the REIT's non-portfolio properties must be, at all times in a taxation year, qualified REIT properties. REITs are usually structured as mutual fund trusts under Canadian tax law (i.e. a qualifying publicly-traded unit trust resident in Canada that holds certain property). There are also certain anti-avoidance rules that a REIT in Canada must be mindful of in order to preserve its tax treatment, such as the specified investment flowthrough tax (SIFT) rules.

15. Apart from REITs, are there any other tax-efficient real estate investment vehicles or structures which are commonly used to acquire, hold and exploit real estate in the jurisdiction?

There are several methods to structure the purchase of a real estate investment, including, among others:

• Corporation
• Personal ownership
• Partnership (general partnership or limited partnership)
• Co-ownership / joint venture
• Trust
• Mortgage investment corporations (also known as MICs)
• Pension investment corporations
• Any combination of the above

The choice of investment vehicle will depend on a number of factors. A prospective investor should consult a Canadian tax advisor with respect to the Canadian tax implications relevant to their particular circumstances before investing in Canadian real property.

16. Are there any structures commonly used to mitigate real estate tax liabilities on acquiring and/or disposing of real estate?

Canadian corporation

For Canadian real estate acquired and sold, it may be advisable for a non-resident to utilize a Canadian corporation in order to avoid the requirement to obtain a Section 116 compliance certificate on a future disposition of the property by the Canadian corporation.

Bare trustee/nominee corporations

A common and simple business structure involves one party (typically a corporation) holding legal title for and on behalf of the beneficial owner(s).  The holder of the legal title, known as a “bare trustee” or “nominee,” is disregarded for income tax purposes.  This is because a “disposition,” for Canadian income tax purposes, does not generally occur until beneficial ownership has changed. New rules regarding additional reporting obligations for trusts came into effect for 2023 onwards. Among the new statutory rules, bare trusts are now required to file annual tax returns and disclose beneficial ownership information to the CRA. For the 2023 and 2024 taxation years, however, the CRA announced that bare trusts will not be required to file the annual return unless CRA makes a direct request for these filings.

17. Are there any material differences in the way individuals and companies are taxed on acquiring, letting and/or disposing of real estate?

A number of factors will have tax implications for a non-resident acquiring, holding or disposing of real estate in Canada including whether the non-resident is an individual or corporation, whether the non-resident is a taxable or tax-exempt entity in its jurisdiction of residence, and whether the non-resident investor is eligible for benefits under a tax treaty between Canada and its country of residence. A prospective investor should consult a Canadian tax advisor with respect to the Canadian tax implications relevant to their particular circumstances before investing in real estate in Canada.

This guide does not constitute tax advice and readers should note that the laws of each jurisdiction are regularly refined and/or revised, so the statements made in this report are not definitive. However, this guide does provide a summary overview of the state of the law as at 31 January 2025 and will hopefully serve as a useful tool for investors to ensure they understand the unique provisions and distinctions in the various jurisdictions.