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David Rotfleisch On Halal Mortgages: Canadian Tax Treatment and Being Shari’ah-Compliant Yet Taxable In Canada

posted 1 year ago

The Canadian Tax Treatment of Halal Mortgages – An Overview

Global demand for Islamic or “halal” financial products is rising, and this development is being fueled by the unique ability of these products to bridge financial inclusion gaps impacting Muslims all over the world. These financial products are free of “riba,” which loosely translates to “interest,” which is forbidden for devout Muslims according to the Qur’an. Customers who purchase Islamic financial products thereby benefit from goods that, while not free, are devoid of financial fees and are available from non-Islamic financial institutions.

As a result, Islamic financial institutions have developed a variety of products that are in compliance with Shari’ah (Islamic law) and suit the demands that conventional financial institutions address. Mortgages fall under this as well.

Halal mortgage products are booming and helping Muslims in Western nations, like the United States (US), the United Kingdom (UK), and more recently Canada, overcome housing issues. The first Halal mortgage fund in Canada was introduced in 2020 by fintech startup Manzil, heralding the commencement of a plethora of Halal mortgage investment alternatives in Canada. The industry is growing impressively. Mortgages in Canada that complied with Shari’ah were worth an estimated CA$2 billion (US$1.43 billion) in 2017.

Halal mortgages and other Islamic financial products are exempt from all fees associated with traditional financial transactions in Canada, but they are still subject to the proper regulatory control of the Canada Revenue Agency (CRA). This is due to the fact that transactions involving these items generate income, transfer ownership of property, or other values that are within the scope of current Canadian tax laws and regulations.

It, therefore, makes sense that the CRA would concentrate on the surge in the use of these items. A disproportionate number of Muslim charities lost their charitable status as a result of intensified tax audits in June 2021, leading human rights groups to claim that this keen focus might be interpreted as unfairly targeting Muslim organizations.

This article makes it clear that Canadian tax laws already include halal mortgages in their definition. This article clarifies the Canadian tax treatment of these products and briefly introduces the idea of halal mortgages in Canada.

A Canadian Halal Mortgage: What Is It?

Muslims are guided by simple yet complex factors while purchasing a home. It is crucial to evaluate everything, from the required house structure to other legal aspects. Most crucially, financing the ideal home creates a number of concerns that are too numerous to cover in this article.

Because of the ‘interest’ imposed on such products, conventional mortgages do not ‘cut-the-deal’ for people looking for financial solutions that are compliant with shari’ah (Islamic law). Halal mortgages in Canada, however, are shari’ah-compliant since they are designed to follow both Canadian law and the religious beliefs of many Muslims.

The idea that halal mortgages are a free-for-all, as has been perceived, is a significant misperception in Canada. Clients of this product are still required to pay a financial institution carrying costs for the financing package provided to assist in the purchase of their house.

In actuality, consumers who choose halal mortgage products make payments that are comparable to those possible with conventional mortgages, albeit with a different structure in terms of funding source and legal considerations.

How a Halal Mortgage Operates: Halal Mortgages in Canada Help Muslims Who Find a Variety of Conventional Financial Items Unreligious Avoid Financial Exclusion

In essence, customers of halal mortgages are considered to be paying profit – a set markup price, publicly agreed upon between the Islamic financial institution and the customer – instead of interest, which is a unique concept in the conventional mortgage industry.

There are three types of halal mortgage products. The first is a lease-based product known as Ijarah, where a financier agrees to buy and rent a property for the agreed periodic rental payment, which could be made monthly or at another time interval, with the intention of transferring ownership of the property to that customer for a minimal residual value at the end of the lease period. The Ijarah is typically set up like a lease.

The second is the Musharakah Mutanaqisah, a declining partnership-based product in which the customer and the financier jointly buy the property, with the customer subsequently making monthly payments to the financier for both the purchase and rental of the property. Musharakah is set up as a joint venture to buy the property, but the client is still responsible for making any further payments to the financier.

For a variety of reasons, including the problem of double capital gains and land transfer taxes, the requirement that financiers take property downside risks and maintain their propriety interest in the property, among others, both the Ijarah and the Musharakah have adaptability issues under Canadian law. This is due to the fact that, regardless of whether the financier is a joint partner in a Musharakah structure or a lessor in an Ijarah structure, both products continue to vest proprietary interest in them.

Canada uses the third choice, known as Murabaha. Simply put, cost-plus financing describes a Murabaha transaction. The bank (financier), client/customer (receiver), and seller of the property are the parties involved in such transactions (third-party).

In a Murabaha transaction, a client finds a property he or she wants to buy but lacks the requisite funds, like the majority of homebuyers. The bank then buys the property from the third party and sells it to the customer for a price that combines the property’s original cost and the markup or profit component.

For instance, Faisal can go to a bank to get the loan he needs to buy the $450,000 house he wants. The bank can then purchase the property for CAD$450,000 and sell it to Faisal for CAD$460,000, with the remaining CAD$460,000 being paid in either installments or a lump sum at maturity (as the term of the agreement dictates).

Similar to conventional mortgages, a down payment is typically required, and the remaining payments are made in installments. The markup might be viewed as playing the role that interest would typically serve in a normal mortgage, but because of the structuring as a purchase markup, it is not recognized as interest, which is prohibited in Islam.

Furthermore, there are no additional fees assessed in the event of any possible default after the maturity deadline. The best course of action for the Bank is to blacklist the client from purchasing any financial products in the future and to proceed with selling the property, just as would happen if a conventional mortgage borrower missed payments and the bank foreclosed or used a power of sale.

These products raise a variety of tax-related problems. We shall now look at how halal mortgage products affect taxes.

The Tax Man Gets a Big Piece of the Pie Because Halal Mortgages in Canada Attract Land Transfer, Income, Capital Gains, and Harmonized Sales Taxes

Halal mortgages, especially Murabaha, may become undesirable due to the tax burden. Land transfer tax (LTT), which is due depending on rates outlined in provincial tax statutes, is the first burden.

Section 2 of the Ontario Land Transfer Tax Act (Act) of 1990 (as amended) is particularly notable. According to the section, when a financial institution acquires a property that will be mortgaged to a customer, the financial institution must pay a land transfer tax (LTT) of 1% if the property is worth up to $55,000, 1% if it is worth more than that and up to $250,000, 1.5% if it is worth more than that and up to $400,000, and 2% if it is worth more than $400,000. Similar taxes are levied in British Columbia under section 3 of the Property Transfer Tax Act 1996. For properties worth up to $200,000, the tax is 1%; for properties valued between $200,000 and $2,000,000, it is 2%; and for properties priced beyond $2,000,000, it is 3%. All jurisdictions with land transfer taxes have different rates, and some provinces, like Alberta and Saskatchewan, have lower transfer fees. Also, the city of Toronto imposes its own land transfer tax. 

As land transfer tax (LTT) is a one-time transaction fee, it often doesn’t present any major problems. Nevertheless, when a Murabaha product is the object of the transaction, the situation is rather different.

Due to the fact that land transfer tax (LTT) must be paid for each transaction—once when the financial institution purchases the property and once again when it is transferred to the buyer—the Murabaha product is typically subject to double land transfer tax (DLTT). Until the financial institution decides to structure its products differently, this is the case.

Additionally, when the financial institution transfers the property to the client, capital gains tax may be due on the second sale value. A transfer from the bank to the borrower will typically not be seen as a disposition since the borrower (the purchaser) is viewed as the property’s owner from the beginning and the bank is viewed as having held the property in the equivalent of a trust for the purchaser. Concerns about taxes are also brought up by the way that profit is seen to be structured. The aforementioned earnings will be regarded as part of the financial institution’s income. The main issue that is anticipated in this regard is the difficulty in timing the profit recognition where the mortgage term exceeds the three-year maximum time limit for an income recognition reserve based on future payments.

There will be a discrepancy between the period of time over which the mortgage payments, which serve as the income stream, are received and the period during which the financial institution is supposed to include the profit earned as part of its taxable income. Should this occur within the payment period or at the time the business assets are sold? Naturally, under a conventional loan, the earnings will be recognized as “interest” and subject to taxation over the length of the loan. The Harmonised Sales Tax (HST) or Goods and Services Tax (GST) is also applied to Murabaha. HST is charged on services including disbursements, real estate commissions, appraisals, home inspections, and survey costs but not on the mortgage arrangement itself. Murabaha transactions are subject to the aforementioned taxes, some of which may even apply twice.

The Financial Product Is Overtaxed and Expensive Due to the Many Tax Requirements Associated with Halal Mortgages

As a result, the Canadian Tax Law for mortgages adheres strictly to its intended interpretation of mortgage transactions and, regrettably, pays no special attention to the spiritual motivations behind structuring Islamic transactions in a way that complies with shari’ah.

The goal is to make money without compromising the religious duties associated with these transactions. Conventional mortgages have identical tax duties, but halal mortgages appear to be sandwiched between taxes and may be susceptible to double or excessive taxation.

However, the burden of these obligations may be lessened for the client (mortgagee) because first-time Muslim homebuyers, like other first-time homebuyers, may qualify for land transfer tax rebates of up to $4,000 and $4,475 for tax residents of Ontario and Toronto, respectively, as well as provincial HST rebates of up to $24,000 and federal rebates of $6,000 each.

Reiterating that the client, not the bank, is entitled to the rebate is necessary. Moreover, because the rebate laws are intricate and technical, the transaction must be arranged carefully.

Financial institutions like Manzil have created a Special Purpose Vehicle (SPV) as a commercial entity to execute halal mortgage transactions in a way that doesn’t draw additional taxes and increases the financial competitiveness of their financial products due to tax-related problems. The expectation is that halal mortgages will alleviate Muslims’ financial marginalization due to their religious beliefs without necessarily placing an undue financial burden on them, yet it is not believed that they will be without drawbacks and benefits. Unfortunately, this will continue to be the case until some kind of religious exemption is established to grant first-time Muslim homeowners specific advantages or until Islamic financial institutions are able to design their products so that instances of double taxation are eliminated.

Our Canadian Tax Lawyers Tax Pro Tips

  1. Make sure that Islamic financial institutions have not crafted the agreement to subtly shift their tax obligations to you as the customer before committing to halal mortgage transactions with them.
  2. Make sure to pay any incurred taxes to the CRA in order to avoid paying any penalties for non-compliance.
  3. You should always use Murabaha as your halal mortgage product of choice because it is less complicated despite its particular issues.
  4. Use the expertise of our tax lawyers in Toronto before transacting with Islamic financial institutions to be sure there aren’t any unpleasant tax surprises waiting for you.

Halal Mortgages in Canada: Frequently Asked Questions (FAQs)

Question: What taxes am I personally responsible for if I want to buy a house through the Murabaha mortgage program as a Muslim living in Canada?

Answer: Unless you decide to sell the property at a later date, the financial institution is generally responsible for paying the taxes in Murabaha mortgage transactions. But, in the province where the property is purchased, you are required to pay Land Transfer Taxes (LTT). However, if the product acquired is an Ijarah or Musharakah, tax deductions for payments made for rental property will be included.

Question: The tax obligations are numerous, however, I’m thinking about using the Murabaha mortgage product to buy a property in Ontario. Can I qualify for any special rebates if I’m a first-time Muslim house buyer?

Answer: Only individuals are eligible for the rebates offered by the various provinces; corporations, which play a significant role in assisting Muslim Canadians to purchase homes without paying interest, are not.


“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.”


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