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What is the general climate of real estate investment in your jurisdiction?
Domestic and foreign investment in Canadian real estate continues to be steady in regions with high demand and low supply, such as Montreal, Toronto and Vancouver.
Who are the most common investors in real estate?
In Canada, the most common investors in real estate include pension plans, real estate investment trusts, private equity firms, developers and individuals.
Are there any restrictions on foreign investment in real estate?
At the federal level, the Competition Act and the Investment Canada Act provide for notification to, or review by, the federal government in certain circumstances involving acquisitions by non-resident purchasers. The federal Citizenship Act also permits each province and territory to enact laws restricting ownership of real property by non-residents.
At the provincial and territorial level, restrictions on the ownership of real property by non-residents vary from jurisdiction to jurisdiction. However, most jurisdictions have taken measures to preserve farm or non-urban land – for example, the following all limit the amount of farm land that can be owned by non-residents or require that the acquisition of farm land by non-residents be approved by the relevant agricultural commission, in each case subject to certain exemptions:
- the Agricultural and Recreational Land Ownership Act in Alberta;
- the Farm Lands Ownership Act in Manitoba;
- the Land Protection Act in Prince Edward Island;
- the Act Respecting the Acquisition of Farm Land by Non-residents in Quebec; and
- the Saskatchewan Farm Security Act.
Some provinces and territories also require that corporations incorporated outside Canada obtain an extra-provincial licence or complete certain registrations in order to hold and exercise rights over real estate in those jurisdictions.
What structures are typically used to invest in real estate and what are the advantages and disadvantages of each (including tax implications)?
The following structures, individually or in combination, are typically used to invest in real estate in Canada:
- joint ventures; and
- sole proprietorships.
Corporations are considered separate legal entities from their shareholders, which have limited liability but cannot flow through income, losses, gains and capital costs allowances of the corporation, which is taxed or deducted at the corporate level before shareholders are taxed on the distributions of dividends. Corporations are probably the most common real estate investment structure in Canada, but can have onerous and costly registration, operation and annual filing requirements.
Partnerships are not considered to be separate legal entities from their partners, so even though income and losses are computed at the partnership level, they are exigible at the individual partner level, which is the primary reason for investing in real estate through a partnership. In general partnerships, all of the partners have unlimited joint and several personal liability for obligations of the partnership and can participate in management. In limited partnerships, limited partners’ personal liability is limited to their individual capital contributions in the partnership, provided that they do not participate in managing the business.
Trusts are not considered separate legal entities, but unlike partnerships can be taxable under the Income Tax Act (Canada). Their assets are held in trust by trustees for the benefit of beneficiaries, both of whom can, in some circumstances, be personally liable, subject to indemnification of the trustees from the trust’s assets and beneficiaries and the fact that publicly traded real estate investment trusts have certain legislative protections. Income may be taxed at the trust or beneficiary level.
Joint ventures are not considered to create separate legal entities, so income and losses flow through to the investors, which can claim certain tax deductions independent of the other co-venturers. Joint venture and co-ownership agreements should be drafted carefully in writing in order to avoid mischaracterisation of the joint venture as a partnership and unlimited joint and several liability of its members.
Individual ownership is simple and flexible, and has the advantage of direct income, losses, gains and capital cost allowances under the Income Tax Act (Canada), but has the disadvantage of personal and unlimited liability.
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