Tax aspects of real estate transactions:

Transcription

1 Tax aspects of real estate transactions: 10 things you need to know James Papadimitriou, Christian Meighen, Ryan Rabinovitch and Sébastien Thomas

2 Plan 2 Income tax 1. Taxable Canadian property/taxable Québec property 2. Pension fund real estate investment corporations 3. Real estate investment trusts ( REITs ) GST/QST 4. Self-assessment in real estate transactions 5. Nominee corporations 6. Joint venture elections Land transfer tax 7. Imposition 8. Anti-avoidance rule Property tax 9. Information requests 10. Objections

3 Income Tax 1. Taxable Canadian property/taxable Québec property Clearance certificates must be obtained when a non-resident disposes of taxable Canadian property or taxable Québec property ( Section 116 Certificates ) What is taxable Canadian property / taxable Québec property? Immoveable property situated in Canada Shares of resident or non-resident corporations and interests and partnerships or trusts which, at any time during the 60 month period prior to the sale, derive their value from immoveable property situated in Canada/Québec Non-resident vendor s responsibilities The non-resident vendor may provide the CRA/RQ with notice prior to the sale, but must provide the CRA/RQ with notice within 10 days following the sale Purchaser s responsibilities Withhold and remit, as appropriate, 25% (12.875% in Quebec) of the purchase price of non-depreciable property or 50% (30% in Quebec) of the purchase price of depreciable property or immoveable property that is inventory, unless the Minister provides the purchaser with a clearance certificate in respect of the property Note: The obligation to obtain a clearance certificate in respect of shares of a corporation that are taxable Québec property does not apply to individuals 3

4 Income Tax 2. Pension fund real estate investment corporations 4 Investments in real estate carry risks related to environmental liability It is therefore often preferable to have real estate of a pension fund held by a corporation rather than directly by the pension fund in order to shield the other assets of the pension fund from liability Provincial and federal pension legislation allow pension funds to hold their investments in real estate through subsidiary corporations The Income Tax Act (Canada) also facilitates such arrangements by granting an exemption from tax to corporations used by pension funds to invest in real estate, provided certain conditions are satisfied

5 Income Tax 2. Pension fund real estate investment corporations 5 A pension fund real estate investment corporation must satisfy certain conditions in order to be exempt from tax: All of the shares of the corporation and all of the rights to acquire its shares must be held by one or more pension funds at all times AND, either: The corporation s sole activities must be acquiring holding, maintaining, improving, leasing or managing capital property that is a real property; and If the corporation borrows money, it must only do so for the purpose of earning income from real estate or a right in respect of real estate OR: The corporation must only invest in real estate or other permitted investments under federal or provincial pension legislation

6 Income Tax 3. REITs 6 A REIT is an investment fund designed to allow investors to pool their assets together to acquire real estate and earn income from the real estate A REIT s income tax is generally entirely borne by its ultimate investors. However, where the REIT s investors are pension funds or other tax-exempts, the REIT s income is effectively never subjected to tax Combining a REIT reorganization with an IPO opens the door to several commercial opportunities, including: Monetizing the value of assets on a tax-deferred basis up to their tax cost Creating a non-taxable vehicle that will generate a higher return for investors Gaining access to Canadian capital markets

7 Income Tax 3. REITs 7 In order to qualify as a REIT, a fund must meet five tests: 1. 90% real property: At least 90% of the FMV of the assets of the fund must be comprised of, among other things, rental property and leases 2. 90% passive income: At least 90% of the fund s gross revenue must be derived from, among other things, rent from real or immoveable properties, interest, dividends, royalties and dispositions of real or immoveable property that is capital property 3. 75% immoveable property: The total FMV of the assets described in paragraph 1 cannot be less than 75% of the equity value of the fund 4. 75% income from immoveable property: At least 75% of the fund s gross revenue must be derived from rent from real or immoveable properties, interest on mortgages in respect of real or immoveable properties and dispositions of such property that is capital property 5. Units of the fund must be traded on a designated stock exchange

8 Income Tax 3. REITs Public Allocation of trust income Public Public No tax payable Tax payable at ± corporate rate RealCo REIT SIFT Business Allocation of rental income LP Real estate used to carry on business Rent Real estate No corporate tax payable Business income subject to corporate income tax, but possibility of tax-free returns of capital for investors

9 GST/QST 4. Self-assessment in real estate transactions 9 Given that the cost of commercial real estate is usually quite high, GST and QST in respect of such property can cause liquidity problems for purchasers (increases to the purchase price) Although purchasers that are registrants for GST/QST purposes may claim a tax credit in respect of the GST/QST paid, they would, in the absence of any relief, have to pay the tax at the time of sale This may cause an unnecessary administrative burden for the purchaser, as it must pay the GST/QST and then claim a tax credit in respect the tax paid To help solve this problem, GST/QST legislation provides for certain alleviating rules in the context of real estate transactions

10 GST/QST 4. Self-assessment in real estate transactions 10 GST/QST legislation provides that the supplier (i.e., the vendor) of real estate need not collect GST/QST from the purchaser if: The purchaser is registered for GST/QST purposes; and This sale is generally not a sale of real property to an individual In such circumstances the purchaser is required to self assess the GST/QST payable in respect of the real estate. This rule is intended to facilitate real estate transactions as it allows the purchaser to claim a tax credit in respect of the selfassessed GST/QST in the same return The practical effect of this rule is that no amount is actually disbursed by the purchaser on account of GST/QST since, on a net-basis, the purchaser will not have any GST/QST to remit (i.e., in its GST/QST returns, the purchaser will deduct its GST/QST credits receivable from the GST/QST it would otherwise have had to remit)

11 GST/QST 5. Nominee corporations 11 It is customary for commercial real estate to be held by a nominee corporation, notably for the purposes of: Protecting the identity of the beneficial owner Easing the administration of the building Facilitating tax planning The nominee will: Be the owner of the building in regards to third parties Be a party to contracts with tenants Be a party to contracts with suppliers Collect amounts payable in respect of leases However, this relationship gives rise to several GST/QST issues

12 GST/QST 5. Nominee corporations 12 GST/QST legislation allows the beneficial owner and the nominee corporation to file an election in order to have the nominee corporation collect GST/QST on behalf of the beneficial owner Note: This election does not release the beneficial owner from its liability in respect of the remittance of the GST/QST collected by the nominee corporation The election does not allow the nominee corporation to claim tax credits on behalf of the beneficial owner Only the beneficial owner can claim tax credits In practice, situations arise where the nominee corporation mistakenly claims tax credits (without the beneficial owner even being a registrant for GST/QST purposes) Revenue Québec s administrative tolerance of such arrangements ended on January 1 st, For filing periods ending prior to January 1 st, 2015, Revenu Québec has administratively agreed to limit reassessments to the 24 month period prior to such date and to only apply a 4% penalty on the amounts assessed. As a condition for qualifying for this treatment, the beneficial owner is required to retroactively register and claim the credits denied to the nominee corporation Election not very useful in most situations

13 GST/QST 6. Joint venture elections 13 Joint ventures are often used for the purpose of holding commercial real estate A joint venture is not a person for GST/QST purposes A joint venture cannot be registrant for GST/QST purposes A joint venture cannot: Collect and remit GST/QST Claim tax credits Each joint-venturer is liable for GST/QST to the extent of its proportionate share of the income and expenses of joint venture

14 GST/QST 6. Joint venture elections 14 Joint election pursuant to GST/QST legislation in order to designate an operator 273 election The election allows the operator to collect and remit GST/QST on behalf of the joint-venturers and claim tax credits on behalf of the joint-venturers. The joint-venturers are solidarily liable for the collecting and remitting GST/QST Note: The joint venture agreement must create a legally effective joint venture from a civil law or common law perspective, as applicable The operator must be a participant in the joint venture According to CRA/Revenu Québec, this means a management company or joint-venturer A nominee corporation can never be an operator Revenu Québec s administrative tolerance of nominee corporations mistakenly designated as operators ended on January 1 st, 2015

15 Land transfer tax 7. Imposition 15 The Act respecting duties on transfers of immovable imposes duties on transfers where a transfer within the meaning of the Act occurs The tax base for transfer duties is the greater of: (i) the purchase price paid, (ii) the purchase price set out in the purchase agreement, or (iii) the FMV of the immoveable within the meaning of the Act Transfer duties are payable upon the registration of the transfer. This creates an opportunity as regards structures involving the holding of title to property by a mandatary Note: Exemptions are available under the Act for transfers occurring between two closely related legal persons i.e. ownership of at least 90% of the shares (exemption in s. 19 d) of the Act)

16 Land Transfer Tax 8. Anti-Avoidance Rule 16 Note: The Act respecting duties on transfers of immovable and the Taxation Act (Québec) provides for the imposition of special duties in the event that an acquisition of control occurs 24 months after an exempt transfer under s. 19. Special duties apply where Control of a corporation is acquired by a person or a group of persons An immovable was transferred to such corporation 24 months prior to that time The transfer was exempt from the payment of transfer duties pursuant to s. 19 It can be reasonably considered that the immoveable was the transferred in anticipation of the acquisition of control of the corporation by the person of group of persons The special duties are equal to 125% of the amount of transfer duties that would have been payable in respect of the transfer

17 Property Tax Introduction 17 The Act respecting municipal taxation and the Act respecting administrative justice Roll of three (or four) years All immoveables are placed on the roll as a unit of assessment (tax base), save for a specific exceptions ( deductions for industrial or agricultural production and control of pollution) Special regimes (mines, oil, electricity, railways, telecommunications, golf, wood industry and religious buildings) Actual value : same proportion of the value on July 1 st two years prior to the time Tax rate (residual, multi-residential, commercial, industrial, agricultural and vacant) - coefficient The roll is fixed, save for specific exceptions Three valuation methods (parity, income and cost with the assistance of a manual and adjusting factors)

18 Property Tax 9. Information requests 18 Powers of the assessor Exercise of the functions Visit and inspection Information request

19 Property Tax 10. Objections 19 Administrative review New roll (April 30), update of the roll (60 days) and failure to update the roll (one year) prescribed form Presumption of the accuracy of the roll depends on the evaluations of the assessor or disclosure of his working papers burden on the taxpayer or not? Objection does not suspend payment Reply of the assessor (September 1 st, or 120 days)

20 Property Tax 10. Objections 20 Appeal before the Administrative Tribunal of Québec 60 days after the assessor s reply Object of the review and appeal must be the same the taxpayer decides what to dispute arguments can only be improved somewhat after the fact Objection on the: (i) composition; and (ii) value The correction must correct an actual prejudice caused to the taxpayer margin of error What happens during the hearing?

21 VANCOUVER Suite 1300, 777 Dunsmuir Street P.O. Box 10424, Pacific Centre Vancouver (Colombie-Britannique) V7Y 1K2 Tél. : Téléc. : Sans frais : CALGARY Suite 3300, 421 7th Avenue SW Calgary (Alberta) T2P 4K9 Tél. : Téléc. : Sans frais : TORONTO Box 48, Suite 5300 Toronto Dominion Bank Tower Toronto (Ontario) M5K 1E6 Tél. : Téléc. : Sans frais : MONTRÉAL Bureau , rue De La Gauchetière Ouest Montréal (Québec) H3B 0A2 Tél. : Téléc. : Sans frais : QUÉBEC Le Complexe St-Amable 1150, rue de Claire-Fontaine, 7 e étage Québec (Québec) G1R 5G4 Tél. : Téléc. : Sans frais : ROYAUME-UNI & EUROPE 125 Old Broad Street, 26th Floor London EC2N 1AR ROYAUME-UNI Tél. : +44 (0) Téléc. : +44 (0)