The ease of movement between Canada and the United States leads to many Canadians owning properties in the U.S. and many U.S. citizens owning properties in Canada. Due to the popularity of Canadians owning rental properties in the U.S. to spend their winters, many tax articles tend to cover the taxation of U.S. property owned by foreigners, including Canadians.
In this article, AG Tax analysts have covered the taxation of capital gains on the sale of Canadian properties, such as: condominiums (condo), rental apartments, or town homes owned by individuals who are U.S. and Canadian citizens but residents of the United States.
Selling Canadian Rental Properties as a non resident
The Canada Revenue Agency (CRA) does not impose tax on an individual based on his/her citizenship but rather imposes taxes based on an individual’s residency. As a result, an individual who was born in Canada but is currently living in the United States or any other country and earns income from Canadian real estate will be treated as a non-resident taxpayer in respect of the tax treatment of the capital gain from the sale of the property.
In Canada, the CRA requires the purchaser, whether resident or non-resident to withhold 25% (50% in certain cases) of the payment made by him/her to the seller(s). In addition, non‑resident vendors who dispose of Canadian property have to notify the Canada Revenue Agency (CRA) about the disposition either before they dispose of the property or within ten days after the disposition. Late filing could lead to penalties even if no taxes are owed. If the property is jointly held, then multiple penalties will apply
When the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of property, or appropriate security for the tax, the CRA will issue a “certificate of compliance” to the vendor. A copy of the certificate is also sent to the purchaser. Upon receipt of a copy of the Certificate of Compliance, the purchaser can release the amounts withheld to the non-resident. This entire process could take a minimum of 3 months, therefore it is highly recommended that a seller apply for the certificate in advance to finalize the sale within the expected period. A certificate of compliance must be submitted within 10 days of the sale.
If the purchaser does not receive the Certificate of Compliance or a “comfort letter” from the CRA, they are required to remit the amount withheld to the CRA within 30 days after the end of the month in which the property was purchased. Failure to remit the withholdings to the CRA by the due date may result in a penalty to the PURCHASER equal to 10% or 20% of the amount that was required to be remitted.
After the end of the calendar year, the non-resident is required to file a Canadian tax return to report the sale. A final settlement of tax will be made when the vendor’s income tax return for the year is assessed.
What if the property has been used as ‘Primary Residence’ for a certain period
A property qualifies as a principal residence for any year if it meets all of the following four conditions:
- It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation acquired only to get the right to inhabit a housing unit owned by that corporation.
- The property is owned by the taxpayer or joint ownership with another person
- The taxpayer, or their spouse/common-law partner, or children must have lived in the house at some time during the year
- The taxpayer should consider it as his/her principal residence.
Sale of a principal residence does not need to be reported on the annual income tax return, nor does the individual need to pay any taxes on the capital gain from the sale proceeds of a principal residence. But if the house was a principal residence only for certain number of years during ownership, the capital gain applicable for only those years that the house was a principal residence would be non-taxable, in this case the person would need to allocate the capital gain separately to each year, and report the gain for those years when the house was not a principal residence.
When a non-resident sells a property that was once his/her principal residence, the property is still subject to the withholding rules and clearance certificate requirements discussed above. An additional calculation will be attached to the application for the clearance certificate showing the amount of gain (if any) that will be taxable.
What if the property was leased/rented out
Rental income earned by a non-resident is separately reported from the sale of the property. If a non-resident rental election has been made any expenses may be deducted from rental income. To the extent any depreciation was claimed in the past while the taxpayer was a resident or a non-resident, the income will not be considered capital gain. When applying for the certificate of compliance, a separate calculation will need to be made to show the amount of depreciation being recaptured.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
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