Sale Of Property by a Non Resident
Generally speaking, you are a non-resident for tax purposes in Canada if you:
- normally, customarily, or routinely live in another country and are not considered a resident of Canada;
- do not have significant residential ties in Canada;
- you live outside Canada throughout the tax year; or
- you stay in Canada for less than 183 days in the tax year.
Canada has the right, under its tax laws, to tax the sale of your Canadian real estate.The Income Tax Act of Canada provides that whenever a non-resident disposes of real estate, the non-resident is required to pay the taxes on any gain.
Where a non-resident of Canada sells or otherwise disposes of taxable Canadian real estate, the non-resident seller must obtain a certificate of compliance (“clearance certificate”) under section 116 of the Income Tax Act from Canada Revenue Agency (“CRA”). The seller must provide to the buyer, on or before closing, a clearance certificate from CRA.
If the non-resident seller does not obtain the clearance certificate prior to closing date, the purchaser is obliged to withhold a portion of the purchase price (25% on non-depreciable property and 50% on depreciable property) and remit it to the CRA on account of the non-resident seller’s liability under the Income Tax Act. The amount so withheld must be remitted to CRA within 30 days of the month end in which the sale closed. For example, if the sale closed on March 15, the holdback must be remitted by April 30.
If the non-resident Vendor obtains a clearance certificate prior to this date, CRA allows the purchaser to remit to CRA the amount stated on the clearance letter and release the remaining amount to the purchaser’s lawyer.
If a clearance certificate or a comfort letter is not obtained by the end of the second month after closing, the purchaser’s lawyer is obliged to remit the full amount of holdback to CRA.
If the purchaser fails to comply with the non-resident withholding tax regime, it becomes liable for the non-resident seller’s tax.
Please note that the holdback is mandatory and the holdback amount is the percentage of the purchase price and not the net sale proceeds or profit.
If you are a non-resident, who is disposing of Canadian real estate, you must consider the impact of the withholding rules of s.116 of the Income Tax Act and obtain advice from your accountant and lawyer. You must consider if you will have sufficient funds to cover the closing costs (e.g. realtor commissions, professional fees, sale price adjustments), and mortgage repayment, if any, over and above the holdback amount.
Depending on the time taken to process the application, the receipt of the clearance certificate may take as long as four to six months to obtain the clearance certificate. It is important to be aware of these timelines in contemplating subsequent investment of sale proceeds.
If you are selling residential property in Canada as a non-resident of Canada, be sure to contact our residential real estate lawyers at Madaans LLP.