Canada: Investment In Canadian Real Estate By A National Of The United Arab Emirates

Last Updated: November 8 2012
Article by William J. Bies and Thomas Brook

The robust Canadian real estate market has attracted considerable interest from residents of the United Arab Emirates ("UAE"). Much of this interest has been focused on residential real estate both for personal use and for investment.

In order to maximize the value of their real estate investment in Canada, UAE investors must consider several issues. Many of these issues center upon the rules governing the taxation of non-residents who invest in Canada.

The following overview will outline some of the more significant Canadian tax issues that UAE investors should consider when they intend to use the property to generate rental income as opposed to carrying on a business.


Prior to making a significant investment in Canada, it is important to be aware of the residency criteria for Canadian tax purposes. These criteria will determine how a foreign individual is taxed and can lead to the sudden imposition of unexpected taxes if a foreign individual is found to be resident in Canada.

Residency criteria for tax purposes operate independently of an individual's immigration status. A foreign individual can be deemed to be resident in Canada under Canadian tax law regardless of whether or not the individual has applied for or been granted immigration status in Canada.

Foreign individuals who are considered resident in Canada will be liable for Canadian tax on their worldwide income not merely the income they receive from an investment in Canadian real estate. As such, it is critical that the Canadian residency criteria be reviewed prior to spending time in Canada. Generally, individuals without residential ties in Canada (e.g. their primary home, personal property and social ties are not in Canada) will not be considered resident in Canada. However, under certain conditions, for example if the individual spends more than 182 full or partial days in Canada throughout the year, a foreign individual can be deemed to be resident for Canadian tax purposes.

Even if a UAE investor should be considered to be a resident of Canada pursuant to Canada's tax law, the individual might not be considered to be a resident of Canada by virtue of the Canada-United Arab Emirates Income Tax Agreement (the "Treaty"). Provided certain conditions are met, the Treaty applies to a "national" which includes an individual possessing the nationality of the UAE and a corporation formed in the UAE.


Non-resident individuals may own real estate in Canada through a number of vehicles including directly as individuals, through holding companies or through trusts. Each of these investment vehicles has its own advantages and disadvantages. The choice of vehicle depends on many factors including the particular circumstances of the individual and the treatment of each for UAE and Canadian tax purposes.

a) Individual Ownership

Canadian real estate can be purchased to generate rental income. Even where purchased primarily for personal use the property might be rented periodically. When a non-resident receives income from real property situated in Canada specific tax rules apply.

Under Canada's Income Tax Act (the "Act"), tenants are required to withhold 25% of the gross rent paid to a non-resident landlord. The obligation to withhold even applies to tenants who are non-residents of Canada such as a friend from the UAE who rents the property from the UAE investor for a short period of time. This withholding tax is considered a final tax and is not subject to refund regardless of the expenses which have been incurred to earn the income.

Net Income Election

Fortunately, Canadian tax rules allow a non-resident to elect to be taxed on the net rental income instead of the gross rental income. Once this election is made, the non-resident will be liable for the withholding of 25% of a partial net rental income as opposed to the gross rental income. The partial net rental income for withholding purposes is determined after deducting certain expenses incurred to earn that income such as interest, property taxes and property management fees. Capital outlays and non-cash items such as depreciation (known as capital cost allowance under the Act) are not considered expenses for the purpose of calculating a non-resident's withholding tax liability though they are for purposes of determining the ultimate Canadian tax liability.

When a net income election is made, the non-resident must ultimately file a Canadian tax return. On this return the non-resident reports the rental income and can deduct all applicable expenses (including depreciation) to arrive at final net rental income. This income is then taxed at the graduated rates that are applicable to individuals in Canada. If the tax owed by the non-resident (as calculated on the return) is less than the amount that has been withheld (25% of the net rental income) the individual will receive a refund from the Canadian government. The Canadian tax owing on this basis will often be less than the 25% withholding tax on the gross rental income. The total Canadian tax on the net rental income could be further reduced if, for example, the property is owned by more than one individual and the income from the property is shared.

It should be noted that under certain circumstances the interest paid by the UAE investor to a non-resident of Canada in respect of funds borrowed to purchase the real estate in Canada will be subject to Canadian withholding tax.

b) Ownership through a Canadian Corporation

A Canadian corporation will be taxed as a resident of Canada. It will, subject to certain limitations, be subject to the corporate tax rate that is applicable within the Canadian jurisdiction where the real estate is located.

When funds are removed from the corporation and distributed as a dividend to a non-resident shareholder, a 25% withholding tax will apply. This rate is reduced under the Treaty to 15% where the shareholder is an individual who is a UAE national and to 5% where the shareholder is a UAE corporation which owns at least 10% of the voting shares of the Canadian company.

A Canadian corporation can be financed with a combination of share capital and interest bearing debt. Interest on the debt used to fund the acquisition of real property will generally be deductible to the Canadian corporation in arriving at its taxable income. However, interest paid on any of the Canadian corporation's indebtedness to the UAE shareholder that exceeds the corporation's share capital by a ratio of 1.5 to 1 will not be deductible. Interest on the excess debt will be deemed to be a dividend which will be subject to withholding tax. Generally, when interest is paid to a resident of UAE with whom the corporation is not dealing at "arm's length" (as defined in the Act) the interest payment will be subject to a 10% Canadian withholding tax. Generally, there is no Canadian withholding tax on interest paid to an arm's length lender.

A Canadian corporation may prove to be a less efficient vehicle from a Canadian tax perspective because of the tax at the corporate level and the withholding tax on dividends distributing profits.

c) Ownership through a Foreign Corporation

Income earned by a foreign corporation from the ownership of Canadian real estate will be taxed in much the same way as a non-resident individual's rental income is taxed though without access to the individual's graduated rates where the net income election is made. However, if it is determined that the foreign corporation is carrying on business in Canada through a permanent establishment, the foreign corporation will be liable for both the tax on its Canadian business income and an additional branch tax which in the case of a UAE company is 5% under the Treaty. Branch tax is analogous to the withholding tax on a Canadian corporation's dividend distributions to non-residents but is imposed annually and is not tied to the payment of dividends.

d) Ownership through a Foreign Trust

While Canadian real estate can be owned by a trust resident in Canada it is likely in the case of a UAE investor that a non-Canadian trust will be used.

The trust will be taxed in much the same way as the individual discussed above. The trust will be subject to withholding tax on the gross rental income and will be entitled to make the net income election. The trust will not, however, be entitled to an individual's graduated rates. Unlike the other investment vehicles considered in this article, the trust will generally have to pay Canadian tax on the increased value of the Canadian real estate every 21 years.

Selling Direct and Indirect Interests in Canadian Real Property

Under Canadian tax law a non-resident is taxable on any income (capital gain) arising out of the disposition of "taxable Canadian property" ("TCP"). TCP includes real property situated in Canada and shares of a company, whether Canadian or foreign, where at any time in the past 5 years more than 50% of the value of the shares was derived from real property in Canada. TCP also includes an interest in certain trusts where the 50% test is met in the previous 5 years.

If a property is considered TCP, the purchaser of the property must, unless a "clearance certificate" has been obtained from the Canadian tax authorities, withhold 25% of the purchase price to satisfy the non-resident vendor's tax obligation. This withholding amount may be significantly higher than the actual tax owed by the non-resident vendor on the capital appreciation of the property that is being sold.

Even where property is considered to be TCP the gain realized on the disposition of the property might be exempt from tax in Canada by virtue of the Treaty.

Clearance Certificate

The Act requires every non-resident vendor of TCP to apply for a clearance certificate either prior to the sale of the property or within the 10 days following its disposition. To obtain a clearance certificate it will often be necessary for the non-resident to pay the tax that could be owing on the gain and any taxes which may be outstanding on the rental income.

Obtaining a section 116 certificate prior to the closing of a real estate transaction reduces the potential for complications that can delay a sale and ensures significant funds are not withheld by the purchaser.

Sales Tax

When collecting rent from real property situated in Canada a non-resident should also be mindful of commodity taxation. Although the payment of rent for residential real property that is under a long term lease is exempt from Goods and Services and Harmonized Sales Tax ("GST/HST"), the rental of commercial property, the short term rental of residential property and certain services associated with real property are not. Upon the acquisition of commercial real property, the initiation of a short term rental or the provision of services, appropriate steps should be taken to register for GST/HST.


Significant savings can be realized with proper tax planning. As such, in order to realize the full potential of an investment in real estate in Canada, it is essential that UAE investors understand how Canadian tax rules affect their particular situation.

Small differences in the circumstances of each person can result in significant differences in how a person is taxed. In order to minimize the tax consequences caused by these differences it is essential that professional advice be sought. This advice will enable the identification of the ownership and ongoing investment structure that is best suited to a UAE investor's own circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.