Non-resident realty investors may be subject to Quebec rules imposing double taxation
There are particular potential pitfalls that can arise for a non-resident investing in Quebec rental properties or other investments:
- The Quebec Taxation Act departs from the federal rules by deeming Quebec rental properties to be a Quebec establishment, with the result that the rental income therefrom is subject to Quebec income tax, whereas there is no federal abatement for provincial tax if the income is considered to be income from property – hence, there is double taxation.
- A similar double-taxation problem arises when the property is disposed of.
- Non-resident inter vivos trusts that own immovable property in Quebec and earn rental income therefrom are considered to have a “specified immovable property.” On a disposition of such property by the trust, the taxable portion of the capital gain (and recapture) will be subject to federal income tax and Quebec surtax at a combined rate of 48.84% (i.e., of 24.42% on the capital gain). However, by virtue of the specified immovable property constituting taxable Quebec property, there is further tax at an effective rate of 12.875% on the capital gain, resulting in a combined effective rate of 37.30%.
- On a literal reading of the taxable Quebec property definition, that term can include a closely-held company share that derives its value principally from a Canadian resource property, even where there is no connection to Quebec, e.g., shares of a Canadian corporation holding only Alberta exploration rights. The ARQ has declined to acknowledge that it lacks the constitutional authority to impose tax in these circumstances.
It is suggested that where a non-resident wishes to invest in a Canadian property that generates active business income, such as an assisted–living facility, the unavailability of a s. 216 structure for business income can be addressed by using a headlease structure under which the non-resident headleases the property under a passive net lease to an operating subsidiary that instead carries on the active business of dealing with the residents, space tenants, hotel patrons, etc.
Neal Armstrong. Summaries of Michel Ranger and Rhonda Rudick, “Federal and Provincial Tax Considerations Relating to Non-Resident Investment in Canadian Real Estate”, 2019 Conference Report (Canadian Tax Foundation), 32:1 – 39 under Reg. 805, s. 216(1), s. 248(1) – taxable Canadian property – (c), (a).