Blog by Corina Marin

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Selling a property in Canada when you are a Non-resident

It is a well-known fact that non-resident investors have played a part in Canada’s booming condo market. And when these investors finally decide to sell, the Canada Revenue Agency (CRA) certainly wants a piece of that profit. The tax rules surrounding this process are complex, and if not followed properly, can result in a very significant tax liability.

When a non-resident disposes of taxable Canadian property (such as a condo located in Canada, or other Canadian real estate), section 116 of the Income Tax Act requires payment of withholding tax. The non-resident must obtain a clearance certificate from the CRA. Here’s why it is important for all parties involved to make sure this is done: if the certificate is not obtained, the responsibility shifts onto the purchaser to remit either 50% of the purchase price for depreciable property or 25% of the purchase price for other capital property.

Getting a clearance certificate

A non-resident can request a certificate of compliance from the CRA for either a proposed sale, or a completed sale, within 10 days of the date of disposition. You’ll need the T2062 and/or T2062A forms as well as appropriate calculations and documents when making the request, which should be completed by a competent professional.

The appropriate withholdings (25% of the capital gain on the sale, based on sale proceeds less the cost of the property, plus any applicable recapture tax) will be held in escrow by the purchaser’s lawyer. After the CRA has reviewed and approved the request, the representative for the non-resident will be contacted, and arrangements will be made by the lawyers to send the appropriate payment to the CRA. Once the payment has been received, the CRA will issue the clearance certificate to the representative of the non-resident, the remaining funds held in escrow will be released and the sale can finally be considered complete.

The non-resident is still expected to file a Canadian tax return for that taxation year to report the sale; however, the individual should claim the amount of withholding taxes that were paid during the above process against his or her final tax liability. This tax liability will be based on sale proceeds less cost of the property and less any applicable selling costs.

NON-RESIDENT CAPITAL GAINS

As a non-resident selling Canadian real estate, you will be required to remit capital gains tax. In general, this liability amounts to approximately 25% of your capital gain. Your gain is equal to the sale price minus your Adjusted Cost Base (ACB) -see below. Your lawyer is required to initially hold back 25% of the total sale proceeds while filing a Clearance Certificate (see below) on your behalf. Once the certificate is received, processed and approved, your lawyer will release the remainder of funds owing to you (the difference between 25% of the total sale proceeds and 25% of your capital gain). Your lawyer will coordinate with an accountant regarding this filing and the costs are typically around $1000 to $1500 plus HST (Harmonized Sales Tax - 12%) and disbursements.

Adjusted Cost Base (ACB):

In calculating the capital gain on the sale of your property the Canada Revenue Agency (CRA) allows the following costs to be added to the purchase price to determine the adjusted cost base:
The original purchase price
Property Transfer Tax - (typically 1% on the first $200,000 and 2% on the balance of the purchase price)
Legal fees and disbursements on the original purchase price
Cost of furnishings included in the sale (It is critical that you retain the receipts for all furnishings and that they be identified as having been acquired for the property, as well as any Customs documentation showing furnishings that were acquired in other jurisdictions which have been brought to the property.
Strata Corporation (same as HOA in the USA) special assessments for capital improvements
GST (Goods and Services Tax) or HST (Harmonized Sales Tax - applicable on purchases made after July 1 2010)
A portion of the interest on the mortgage payments ( only if the seller has properly elected to have the interest capitalized on their tax return).
***Note:
CRA does not allow any deductions from the selling price in determining your Capital Gain for Clearance Certificate purposes. Accordingly, expenses such as Realtor sales commissions and legal fees incurred on the sale are not included in the ACB calculation. By filing a Canadian tax return subsequent to the sale, the seller may claim these expenses and recover some of the tax paid to obtain the Clearance Certificate.
The Canadian tax return must be filed at the end of the tax year in which the sale completed. For individuals the return is due April 30 for the preceding tax year, for corporations it is due six months after the end of the year in which the sale completed, and for trusts it is due 90 days after the end of the trust’s tax year in which the sale completed. CRA then calculates the actual amount of tax resulting from the sale. If there is a difference between the calculated amount and the amount paid at the time the Clearance Certificate was issued, the difference is either paid by the seller or refunded by CRA. If the seller claims real estate commission and legal expenses on the sale, it is usually a refund.
All non-resident Sellers should contact their accountants or lawyers with respect to requesting a Clearance Certificate as soon as an accepted offer has been received with respect to the property. Should the completion (closing) date be prior to the issuance of the Clearance Certificate a hold back of between 25% and 50% of the sale price will be required by the Purchasers lawyer, until the Clearance Certificate is issued.

CLEARANCE CERTIFICATE

It is a condition for a non-resident who is selling real estate in Canada to obtain a Clearance Certificate from the Canada Revenue Agency (CRA). Prior to the Canada Revenue Agency issuing a Clearance Certificate they will want to collect any tax payable with respect to your property purchase and sale. This will include any tax payable on the rental income from the property which has not already been remitted, as well as tax on the capital gain experienced on the property and if applicable, recapture of capital cost allowance.
Delays in obtaining Clearance Certificates are often lengthy (up to 8 weeks).  A seller should contact their lawyer or accountant to request a Clearance Certificate as soon as an offer to purchase the property has been accepted.  If a sale completes before the Clearance Certificate is issued, a percentage of the selling price ranging from 25% to 50% will have to be held back from the seller’s proceeds until a Clearance Certificate is issued.
Rental Income
If your property has been a rental, you are required to remit tax on the rental income. If you employ a professional rental manager, they should withhold 25% of your rental income for the purposes of remitting tax on your behalf and they'll submit an NR4 tax form. Fees for its preparation and filing vary and usually range from $300-$1000, depending on the nature of the transaction.

Unfortunately, most non-residents are not aware of the complexity of the process involved with the Canadian tax authorities when it comes time to sell. It can even be a considerable headache for a Canadian purchaser, who may inherit the tax burden. Bringing an experienced tax advisor in at an early stage makes the process that much easier for all parties.