By : Jayson Schwarz LLM and Razik Sarsam CPA,CA
1. With international travel still facing disruption due to Covid, what’s your advice to businesses attempting to manage overseas real estate processes as they enter a new market?
Canada is one of the most vaccinated countries in the world with over 71% of the population double vaccinated. Business travellers are welcome and those with double vaccination have no quarantine period provided they follow the published requirements. This allows the opportunity for prospective purchasers or corporate representatives looking to find locations and property for their companies to come into Canada and “kick the tires” of prospective purchases.
Notwithstanding the above, it is our advice that a local solicitor or accountant should be retained to act as a guide and advisor, in order to mitigate any unforeseen circumstances that may arise due to Covid 19. This trusted individual, supervised by his or her respective Law Society and/or Institute,, would have the expertise to assist in managing assets and transactions during any disruption occasioned by Covid 19.
There are other alternatives available in every major municipal centre. Professional property managers, commercial brokers, fund managers etc., abound in the Canadian landscape and the sophisticated foreign corporation looking to establish itself in Canada will have no difficulty in finding the kind of advice it will need to launch a venture and/or purchase real estate in Canada
2. Are there any barriers to cross-border real estate transactions in your jurisdiction, and how can businesses overcome them? Do you have any examples of how you have helped clients to do this?
A barries to cross-border real estate transactions that could directly impact an executive moving to Canada, whom wished, either through his or her corporation or personally, to purchase their home in Canada, could arise in those areas of hot real estate markets across Canada, due to governmental interference in trying to cool the markets down. Local governments have put in place transactional taxes on non-resident purchasers. This can make purchases in certain markets inefficient and costly. If the executive has obtained landed status and become a resident of Canada, these taxes would not apply.
This scenario can be avoided by identifying alternative markets and/or alternative asset classes which are not in the residential segment.
The Federal Government and various Provincial Governments have enacted legislation that may have direct impact on potential foreign investment in Canada. Apart from additional land transfer taxes payable by foreign corporations or beneficial owners of corporations, Provinces like Prince Edward Island have absolutely refused to allow foreign ownership of land in the Province. There are restrictions in other Provinces on the acquisition of agricultural lands. The overriding provisions of the Investment Canada Act for large transactions, cultural implications, international trade agreement status of the Purchaser country of residence, and how the lands and business are being acquired need to be considered. Further the movement of funds into Canada is subject to the Proceeds of Crime and Terrorist Financing Act and Fintrac (the Financial Transactions and Reports Analysis Centre of Canada) was established to watch all funds entering the country to ensure the legality thereto. Therefore source of funds and transparency are critical to any investment.
One of the most difficult of the transitional matters, lack of knowledge of the local landscape, can best be overcome by having a team of Canadian professionals knowledgeable in the areas you require, whom could as an example: source properties, structure the purchase, arrange introductions to finance sources and provide the legal framework necessary to paper a deal.
3. What are the tax implications for businesses purchasing real estate as part of their market entry? How can they make sure they are structuring their real estate deals effectively to mitigate any risks or financial repercussions?
The most common structure for non-resident corporations acquiring Canadian real property is typically done through a Canadian corporation. Ownership of the Canadian corporation is generally held by the foreign corporation making the investment. Foreign corporations will organize their affairs according to the Tax Treaty that is applicable, if one exists, between their home jurisdiction and Canada.
Taxation of real property (rental and disposals) is always sourced in Canada given real property is situated within its jurisdiction. Canadian real property is considered Taxable Canadian Property (“TCP”) under the Income Tax Act (Canada) (the “Act”). The rate at which the TCP is taxed will depend on the structure of the purchaser (corporation, trust, etc.) and where the TCP is located within Canada. The withholding tax, if any, will be linked to the purchaser’s country of residence. Repatriation of earnings to the foreign parent will attract Canadian withholding tax that is typically in the range of 5% – 25%. US corporations eligible for Treaty benefits will typically be subject to 5% withholding tax on distributions out of the Canadian subsidiary. Foreign corporations in other jurisdictions will need to consult their professionals to make the determination.
Capitalizing the Canadian purchaser corporation by the foreign corporation will require an adequate ratio of debt and equity, to ensure the Canadian Thin-capitalization rules are onside. Most often, foreign investors inadequately capitalize the Canadian entity with debt, resulting in significant tax consequences. Section 18 of the Act requires the Canadian purchaser corporation to maintain a 1.50:1.00 debt-to-equity ratio. Failure to maintain adequate debt to equity ratio could result in denial of inter-company interest deductions and recharacterization of the denied interest as deemed dividends which carry a withholding tax liability to the foreign parent corporation.
Often, foreign investors have concerns related to the protection of their investment from unsecured creditors and one method to provide security, is to have monies advanced in a fashion so as to comply with the minimum Thincap Rules and allow for the foreign corporation to loan in funds to the purchasing entity and thereafter secure those loans through mortgage registration on title, general security agreements and registration under the Personal Property Security Acts of the various Provinces. This will rank the foreign parent corporation in a secured position ahead of unsecured creditors.
3-5 Top tips – to avoid common legal and financial real estate pitfalls in your jurisdiction – 200 words max.
- Retain the correct advisory team to provide the benefit of local knowledge;
- Research the target, the market and know the desired result before embarking on any action
- Ensure all necessary financing is in place before taking any steps;
- Effect the best tax planning and minimisation strategy before entering into an agreement;
- Generally take all steps through an Incorporated entity relating to any transaction;
- Be transparent at all steps in the process to avoid issues later;
- Be Bold in a cautious fashion.