In the recent years, there has been a significant increase in purchase of rental property by non-residents, and it is obvious that someday they will be disposing off their Canadian property. However, since filing a tax-return for non-residents is not compulsory if they do not fulfill the ‘resident’ requirement, it might happen that the non-resident entity (individual/corporation/estate/trust/etc.) may not report the capital gain from the sale of their Canadian property, and thereby escape paying taxes to the Canadian government. Therefore, to avoid such a situation the Canada Revenue Agency (CRA) has certain rules and regulations in place which any non-resident entity selling Canadian property needs to comply with for a smooth and compliant transaction.
Since at A.G. Tax, we often have our U.S. and other non-resident clients inquiring about the Canadian tax laws related to selling/disposing of Canadian property, and whether the withholding rules apply to all kinds of properties or just real estate, our tax analysts have prepared a brief overview on Section-116 of the Income Tax Act (ITA) related to sale of property located in Canada for other non-resident owners of Canadian property seeking guidance. Nonetheless, it is always advisable to consult a professional regarding any tax situation as every situation varies, and a recommendation that works for one person may not be the most appropriate/best measure for another individual.
Income Tax Act Sec-116, Sale of Canadian Property Owned by A Non Resident
As per ITA Sec-116, when a non-resident or a deemed non-resident entity sells of or disposes taxable Canadian property (TCP, such as: real estate), the Canadian government must be informed about it within ten days of the completion of the transaction to obtain a certificate of compliance.
This certificate can be obtained by filing Form T2062: Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property (T2062A/T2062B/T2062C in some cases), and providing either an advance payment of the taxes, or an acceptable amount as security for the taxes that would be due on the sale to the CRA along with certain property-related documents once the transaction has been finalized.
25% Tax Withholding Requirement by Buyer
In cases wherein the non-resident seller has not obtained a ‘Certificate of Compliance’ from the CRA or it has been delayed, the buyer/purchaser of the property is required to withhold 25% of the gross selling price (50% for depreciable property), and remit it to the CRA. At times, the lawyer may keep custody of this 25% withheld amount on behalf of the CRA until the certificate is obtained by the seller to avoid penalties and interest.
As taxes need to be paid only on the capital gain (selling price less adjusted cost basis) the seller can claim a refund of the excess amount (entire withholding if there is no capital gain) by filing a Canadian income tax return by 30th April of the tax year, and reporting the capital gain made from the sale of the property.
Benefit of Obtaining The ‘Certificate of Compliance’ Early
One of the advantages of obtaining the clearance/compliance certificate early or in advance is that the amount remitted to the CRA for the certificate issuance is estimated as 25% of the net profit (sale price less the adjusted cost basis) instead of 25% of the gross selling price as required in cases where the purchaser withholds the 25% taxes.
Example: If Mr. A, a non-resident individual estimates the selling price for his Canadian real estate property costing CAD $100,000 to be CAD $200,000. Based on this he can apply for the ‘Compliance Certificate’ with an advance payment of $25,000 (25% of $100,000 capital gain).
But if he sells off his Canadian property without the ‘Compliance Certificate’ in place, the purchaser (irrespective of whether a Canadian resident or non-resident) needs to withhold 25% of $200,000, which is $50,000.
Additionally, since issuing a compliance certificate can consume a long time, ranging from 8 to 10 weeks, it is best to have it in place before the sale. Consult your tax professional for more details.
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.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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