Are you or your client a non-resident of Canada that has sold real estate in Canada? If you answered yes, then you and/or your client should be aware of the tax implications applicable to non-residents of Canada.
A non-resident of Canada will be subject to tax on any income or gains resulting from a disposition of taxable Canadian property. The most common properties sold are residential homes, vacation properties, and/or land. Here in Kelowna, many non-residents of Canada own Big White properties and are ultimately impacted when they decide to sell.
When a property is sold by a non-resident of Canada, the purchaser of the property is required to withhold and remit a portion of the purchase price to the Canada Revenue Agency (CRA). In general, this amount would be 25% of the gross selling price. In some cases, if the property is depreciable property (used in rental activities) then the amount withheld increases to 50%. As an example, if a non-resident of Canada sells Canadian real estate for $500,000, $125,000 would have to be remitted to the CRA.
The requirement to withhold 25% of the gross proceeds can be avoided if a request for a certificate of compliance related to a disposition of property is filed and approved by the CRA within 10 days after the disposition, or in advance of the disposition. The effect is that it can either reduce or eliminate the withholding taxes that have to be remitted by the purchaser. Upon filing the certificate of compliance, a withholding tax of 25% is usually required (if any) and is calculated on the gross sales proceeds net of the purchase cost of the property.
Liability of the Purchaser:
Until the non-resident vendor obtains a certificate of compliance, the purchaser is required to withhold and remit 25% of the gross selling price on behalf of the non-resident vendor to the CRA within 30 days after the end of the month in which the purchaser acquired the property if a clearance certificate has not been received by the non-resident vendor. However it could take the CRA up to 8-12 weeks to issue a certificate of clearance, and as a result the CRA is not usually able to process a notification and issue a certificate before the actual closing date. It is common practice that the purchaser’s lawyer to arrange, through an undertaking with the purchaser’s lawyers, a hold back amount equal to 25% of the gross selling price of the property. The lawyer withholds the amount in trust on behalf of the CRA and notification is given to the CRA to allow them to issue a comfort letter. This comfort letter confirms that the purchaser may continue to retain the withheld funds beyond the statutory remittance date without incurring any interest or penalties.
Canadian Tax Return Requirement
There will be a requirement by all non-residents of Canada to file a Canadian tax return by April 30 following the year of disposition. Even though a withholding tax of 25% has already been submitted, it is not considered a payment of income taxes. Taxes are actually determined on the filing of the Canadian tax return, and may likely result in a refund to the non-resident in most cases because the amount of withholding tax paid is much higher than the actual tax liability.
We will provide a follow up series to this article for non-residents engaged in the rental of their Canadian properties, and its related compliance requirements.
If you or your non-resident client have or are considering disposing of taxable Canadian property, speak to your Kelowna accountant to discuss how he/she can help you achieve the compliance requirements in a timely manner.
This blog posted on Dome Duong Chartered Accountant provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. There are many pitfalls to the strategies discussed above and professional tax advice with your Kelowna accountant is essential.