New Tax Treatment for Rental Properties
Under existing legislation, the taxation of non-resident inter vivos trusts that hold real (immoveable) property in Quebec are generally subject to the following taxation:
- Business income (including recaptured depreciation) and income from the disposition of Quebec taxable property are subject to federal Part 1 tax and Quebec income tax, but property income (such as rental income) is only subject to federal Part XIII tax
- For provincial tax purposes, capital gains realized from the disposition of immoveable property in Quebec are taxable in Quebec. If the trust resides in another Canadian province, the capital gain on the property situated in Quebec is taxable in the province of residence of the trust and not in Quebec.
During the course of its audits, the QRA noticed that certain inter vivos trusts that did not reside in Canada became residents of Canada (but not Quebec) before the disposition of their rental properties situated in Quebec. As a result, these trusts' resulting capital gain was not taxed in Quebec. The 2012 Quebec budget included two proposals to address this concern.
New rental income tax
The budget subjects an inter vivos trust that does not reside in Canada at any time in the year (specified trust) to a new 5.3% tax on its property income from the rental of specified property, unless that income is from a business carried on in Canada and attributable to a permanent establishment situated in Quebec. Specified property is an immoveable rental property situated in Quebec that is mainly used for purposes of earning or producing gross rental income. This rental income must be calculated separately from the specified trust's income from other sources, and reported on a tax return for each taxation year that it owns specified property, even where no income tax is payable.
Deemed disposition of rental property upon immigration
The budget deems a non-resident inter vivos trust that becomes a resident of Canada to dispose of its rental immoveable properties immediately before becoming a resident of Canada. To ensure that Quebec tax is paid on any capital gains resulting from this deemed disposition, the trust will have to obtain a certificate of compliance from Quebec before actually disposing of a Quebec rental property that it owned when it changed residency. The purchaser of this Quebec immoveable property could be held liable for the Quebec tax, to a maximum of 12% of the purchase price of the property, if a certificate is not received.
The proposed amendments will apply to inter vivos trusts that become a resident of Canada on or after March 20, 2012.
Increase to Top Marginal Rate for Inter Vivos Trusts
The 2012 Quebec budget proposes to increase the top tax rate for inter vivos trusts to equal the top personal tax bracket of 24% for taxation years ending after March 20, 2012. For taxation years that straddle this date, taxes will be computed proportionately.
The existing legislation calculates the tax on an inter vivos trust (other than a mutual fund trust and specified investment flow-through trusts) at a rate equal to the greater of the rate according to the progressive tax rates applying to individuals, and 20%.
As Quebec's top marginal tax rate for individuals is equal to 24%, an individual Quebec taxpayer taxed at the highest marginal rate could have used an inter vivos trust to lower his or her overall effective tax rate by as much as 4%, depending on the level of income earned by the trust.
For more information, contact your KPMG adviser.