Diminishing Musharakah mortgages are a popular option in Islamic finance, allowing homebuyers to avoid interest-based loans. But in Canada, this model has a big problem: unexpected taxes make it way more expensive than it should be!
Instead of taking a traditional loan, the buyer and the bank buy a home together. For example:
Over time, the buyer gradually purchases the bank’s share, making monthly payments until they fully own the home. Sounds simple, right? Unfortunately, Canadian tax laws make it complicated.
In Canada, every property sale triggers taxes like:
With a Musharakah mortgage, the home is technically sold twice:
1. First, from the original seller to the partnership (buyer + bank)
2. Then, gradually from the partnership to the buyer
Each of these transfers means extra taxes, making the total cost of buying a home much higher than expected
Let’s say a young Muslim couple, Karim and Ayesha, buy a $800,000 home using a Musharakah mortgage:
Normally, Karim and Ayesha’s cost would be based on this rate. But because the home is technically sold twice, they have to pay about $340,000 in additional taxes, pushing the real cost (“APR”) up from 6.75% to 11.91%! That’s almost double the expected amount.
*Note: The above calculation is an estimate. Actual calculations will depend on each individual’s income, home price, and other factors; please verify your specific calculation with your lawyer and tax advisor.
One possible solution would be to buy the house under a corporation or limited partnership, with the lender and buyer owning shares in the company. Instead of transferring property ownership directly, the lender would sell company shares to the buyer. This means the house ownership technically doesn’t change since the corporation / partnership owns it. So does that solve the tax problems?
Partnership structures are very complex and involve a lot of variables that can impact how the borrower and lender are both taxed. These include borrower’s province, income, purpose of the home (i.e., primary residence or investment property, mortgage term and amortization, early payments and/or early discharge. As a result, such partnership / co-ownership structures need to be reviewed very carefully on a case-by-case basis due to their extreme complexity and associated risks. For example, if an Ontario borrower prepays their mortgage in full by purchasing more than 5% of the property from the Musharakah lender, then they will be forced to pay land transfer tax on the entire purchased amount. Each province has its own unique rules.
In the UK, many Musharakah borrowers now face huge, unexpected tax bills after years of having gone unnoticed by the UK tax authorities. This happened despite the fact that Islamic banks issuing these products structured them in compliance with the law. However, as the volumes of these Musharakah-based mortgages increased, they attracted the attention of the UK tax authorities. Canada could have the same outcome if lenders and borrowers don’t follow tax laws properly.
Read more about this in this news article.
Another major problem with the Musharakah product is that since the halal lender owns a share of the property, if the lender goes bankrupt, the borrowers could lose their homes and face severe disruptions to their lives. Title does not matter here, because the Musharakah agreement states that the lender is a partner in the house (or corporation holding the house). Also, the mortgage security is registered in their lender’s name. If the lender becomes insolvent, their creditors may use the mortgaged property to recover their funds.
This Reuters article explains what happened when a Canadian halal lender declared bankruptcy over 10 years ago.
For a halal mortgage product to be truly viable and safe for customers, it must be compliant with Canadian laws, and customers must be protected if the lender goes bankrupt.
EQRAZ has developed a Shariah-certified and Canada-compliant mortgage product that avoids these tax and legal issues completely! Instead of following the flawed Musharakah structure, EQRAZ has developed a Monthly Murabaha mortgage product especially for Canada that provides customers with all the protections of a conventional mortgage, but completely riba-free. Furthermore, EQRAZ has partnered with CMLS Financial, a DBRS-rated, top-3 Canadian mortgage administrator, as well as Canada’s largest mortgage custodian, Computershare, to ensure the ongoing continuity and shariah-compliance of our customers’ mortgages in all outcomes.
This means Muslim homebuyers in Canada can now get a truly halal mortgage without hidden costs or legal risks, and their homes remain safe and shariah-compliant even in the worst-case scenario.
While Diminishing Musharakah mortgages might work in some countries, Canadian tax laws make them expensive and risky. Instead of risking double taxation and hence a much higher cost for a product that is NOT bankruptcy-proof, EQRAZ offers a smart, Shariah-compliant solution that actually works and provides all the benefits of a mortgage that all other Canadians take for granted – without shortcuts or compromise.
Want to learn more? Contact EQRAZ today at EQRAZ or call 1.888.55.EQRAZ (37729) to explore your options for a halal home financing solution in Canada.
Disclaimer: This post is a general interest post and is not to be construed as legal advice. Please speak with your own lawyer and tax advisor.
Halal Mortgages