Selling a property in Canada as a non-resident can be a complex process, with several tax implications and legal requirements to navigate. This blog aims to provide a clear and concise overview of the steps involved, things to note, and an example scenario to help non-residents understand the process better.
Overview
As a non-resident selling property in Canada, you are subject to the Canadian non-resident withholding tax. This tax is designed to ensure compliance with Canadian tax laws and to protect the Canada Revenue Agency (CRA) against non-compliance. Non-residents must follow a specific process, including the withholding of a portion of the sale price and obtaining a Certificate of Compliance from the CRA. It is highly recommended to seek the assistance of an experienced lawyer to guide you through this process.
Things to Note:
Tax Identification Number: You must have a Canadian tax identification number to file the required forms. If you do not have a Social Insurance Number (SIN), temporary taxation number (TTN), or individual tax number (ITN), you need to apply for an ITN using form T1261 alongside your Certificate of Compliance application.
Paperwork: Ensure all property-related documentation is in order and readily available. Most of the required paperwork can be completed beforehand, which ensures that there are no delays when filing.
Withholding Tax: The CRA requires that 25% (or up to 50% in some cases) of the sale price be withheld. However, this is not the final tax amount owed. By applying for a Certificate of Compliance (form T2062), the CRA will calculate the withholding based on 25% of the net capital gains (selling price less adjusted cost base).
Filing Tax Returns: After the sale, you must file a Canadian T2062 and T1 tax return to report the net gain. This process allows you to pay tax at Canada's marginal rates, which are typically lower than the 25% initially withheld.
Adjusted Cost Base: Determining the actual property cost is important when you consider that the amount of tax owed is based on capital gains (calculated as selling price less adjusted cost base). Ensure you are reporting the maximum allowed cost base by including the following (if applicable):
Capital asset additions and/or major renovations
Additions and renovations can be added to the cost base on the sale (except chattels, such as appliances).
You will generally need support for these additions by way of receipts, invoices, and/or cancelled cheques.
Certain exemption eligibility criteria are met (reach out to a lawyer for more information).
Step-by-Step Process
The purchaser withholds 25% (or 50% in some cases) of the total purchase price. This amount is usually held in a trust by the seller's lawyer.
The seller must notify the CRA of the sale by applying for a Certificate of Compliance (T2062 or T2062A) within 10 days of the sale. Late filing can result in penalties of up to $2,500.
The CRA processes the application and issues a Certificate of Compliance, requesting a payment to cover the resulting taxes. This process can take several months.
Once the Certificate of Compliance is received, the purchaser can release the withheld amount to the non-resident seller.
After the calendar year ends, the non-resident must submit a Canadian tax return to report the sale and determine the final tax liability.
Example Scenario
Let's assume a non-resident sold a Canadian property for $500,000, which was originally purchased for $100,000 15 years ago.
Withholding: The purchaser (or seller's lawyer) withholds $125,000 ($500,000 x 25%).
Certificate of Compliance: The seller files for the Certificate of Compliance.
CRA Request: The CRA requests a payment of $100,000 [($500,000 - $100,000) x 25%]. The seller's lawyer remits $100,000 out of the $125,000 withheld to the CRA, and the CRA issues a Certificate of Compliance.
Release of Funds: Once the Certificate of Compliance is received, the seller's lawyer releases the remaining $25,000 ($125,000 - $100,000) to the seller.
Tax Return Filing: Upon filing the non-resident tax return, the actual tax liability is approximately $68,750. The seller receives a refund of $31,250 ($100,000 - $68,750) from the CRA.
Selling a property in Canada as a non-resident involves careful planning and adherence to legal and tax requirements. Understanding the steps and ensuring all documentation is in order can help avoid delays and penalties. Enlisting the help of an experienced lawyer and/or tax professional is crucial to navigate this process smoothly and ensure compliance with Canadian tax laws. By being prepared with the necessary information, non-residents can successfully sell their Canadian property while managing their tax obligations effectively. If you are looking to sell your property and would like more information, contact us today!
Disclaimer: This article is intended for general informational purposes and is not intended to provide any tax or business advice to the reader. Please consult a lawyer about your unique situation. While we try our best to ensure the accuracy of the information in our blogs, we accept no liability for errors or omissions.
Author: Brynn Carmody
Real Estate Assistant
Andrew Perkins Real Estate
Keller Williams Select Realty