Investing in Canadian real estate requires deep tax insight to mitigate risk and optimize outcomes.
Each real estate investment strategy must align with asset type, timeline, returns and structure.
A constantly changing global tax landscape makes staying abreast of evolving tax policies critical.
As U.S. real estate investment trusts (REITs) expand internationally, Canada continues to stand out as a compelling destination. However, investing across the border requires a sophisticated understanding of Canadian tax laws and strategic structuring to mitigate risks and optimize outcomes. Here are key considerations when navigating cross-border real estate investments:
1. Repatriation of profits from Canada can trigger significant tax exposure
U.S. REITs may face higher-than-expected tax costs when bringing profits back from Canadian investments. The Canadian tax system involves complex rules and relatively high exit taxes that can reduce overall returns if not properly planned for. Understanding the mechanics of repatriation and integrating repatriation strategies early in the investment lifecycle is essential.
2. Interest deductibility rules in Canada lack real estate exemptions
Unlike the U.S., Canadian tax law does not carve out exemptions for real estate under its interest limitation regime. The 30% of EBITDA threshold applies broadly, potentially affecting financing structures and underwriting models for real estate acquisitions and developments. Investors must factor this into deal evaluation and consider alternative structuring solutions.
3. Global minimum tax rules introduce asymmetry and added complexity
The implementation of the Organisation for Economic Cooperation and Development’s (OECD) Pillar Two global minimum tax in Canada—without a parallel adoption in the U.S.—creates regulatory inconsistency. This divergence can lead to added complexity in tax compliance, reporting and forecasting. Modeling these impacts in advance is critical to understanding the net tax effect across jurisdictions. Particularly in light of the proposed section 899 impact, there is growing uncertainty, especially given that the undertaxed profits rule under Pillar Two has not been enacted in Canada. It remains to be seen how the Canadian government will respond to mitigate potential retaliatory measures.
4. Structuring decisions should be tailored, not templated
Each REIT’s cross-border investment strategy must be tailored to factors such as asset class, investment horizon, income expectations and joint venture structures. Selecting the appropriate vehicle—whether a corporation, trust or partnership—can significantly affect tax efficiency. RSM recommends combining tax modeling, foreign tax credit strategies and treaty planning to achieve an optimal structure.
5. Compliance obligations can delay cash flows
Nonresident investors in Canadian real estate are subject to a 25% withholding tax on gross sale proceeds unless a clearance certificate is obtained from the Canada Revenue Agency. This requirement can tie up funds for months, if not a year, and complicate exit strategies. Early planning and process management are key to minimizing delays and avoiding unnecessary withholding.
6. Be aware of other taxes or issues
U.S. REITs investing in Canada should also be mindful of complex indirect tax rules, particularly the Goods and Services Tax and the Harmonized Sales Tax, which can create compliance challenges, especially for developers involved in construction or leasing activities. Additionally, REITs may be subject to Canada’s Underused Housing Tax (UHT), a 1% annual tax on certain vacant or underused residential properties owned by non-Canadians. Even if exempt from any UHT tax liability, filing obligations may still apply, and noncompliance can result in significant penalties.
Successfully navigating cross-border real estate investments requires more than a surface understanding of tax law. U.S. REITs (and other U.S. investors in Canadian real estate) must be prepared to manage divergent rules, complex compliance requirements and evolving global tax policies. RSM continues to guide clients through these challenges with a focus on customized solutions, scenario modeling and deep jurisdictional insight.
This article builds on an interview with RSM partner Neil Chander at Nareit's REITwise: 2025 Law, Accounting & Finance Conference® in San Antonio, Texas. Visit Nareit’s website to listen to the recorded interview.
