When selling property in Canada, non-residents must follow the same steps and pay the same taxes as residents. Without competent direction, the procedure can be time-consuming and confusing, with serious consequences for those who make mistakes.
As a non-Canadian resident, selling your home may have tax consequences. Tax expert Emily Richmond of Crowe MacKay explains what those consequences can be.
The Withholding Tax on Non-Residents
Non-Canadian residents are required to pay withholding tax when selling real estate in Canada.
The sale of your Canadian real estate is subject to taxation in accordance with both Canadian law and the terms of most double taxation avoidance agreements. The Canada Revenue Agency (“CRA”) is concerned that it may not receive the necessary tax payments from you if you choose not to file as required because you are not a Canadian resident. Withholding of 25% (or 50% in some situations) of the purchase price is mandated by the CRA. However, this is not the ultimate amount of tax that must be paid.
The Canada Revenue Agency (CRA) requires a withholding tax payment of 25% of the NET capital gain rather than 25% of the sales price when an applicant submits a “Certificate of Compliance” application. However, this does not represent the ultimate amount of tax due. Filing a Canadian T1 tax return stating the net gain will allow you to a large refund of the taxes withheld by the CRA. This is because on the T1 you may deduct our selling expenses and pay tax at Canada’s marginal tax rates, both of which are significantly lower than the 25% tax withheld. The method effectively compels you to file your taxes or risk giving away a substantial sum to the Canadian government.
Crowe MacKay’s tax experts assist non-resident sellers in calculating their expected capital gain and tax payments and filling out the relevant paperwork. Help is available in Alberta, British Columbia, the Northwest Territories, and the Yukon; get in touch if you’re there.
How does one go about selling a home in Canada to Foreign buyers?
Step 1 – To begin, the buyer must set aside 25% (or 50% in some situations) of the purchase price in escrow.
Step 2 – The seller must notify the CRA of the sale or potential sale by submitting a Certificate of Compliance application (T2062 or T2062A). Payment is required no later than 10 days following the close of the sale. Even if no taxes are owed, a late filing will incur a $25 per day penalty, up to a $2,500 maximum. The property tax fines will increase exponentially if the property is held in more than one person’s name.
Step 3 – The CRA will ask for payment or appropriate security to cover the additional taxes owed before issuing a Certificate of Compliance. Although it varies per province, our experience has shown that the CRA currently requires around 4 months to process the documents and provide Certificates of Compliance.
Step 4 – Once the buyer has received a copy of the Certificate of Compliance, they can release the funds withheld in Step 1 to the non-resident.
Step 5- The fifth step is for the non-resident to record the sale on their Canadian tax return after the end of the calendar year.
The sum withheld in Step 1 must be remitted to the CRA within 30 days after the end of the month in which the property was acquired, regardless of whether or not the purchaser received the Certificate of Compliance or a “comfort letter” from the CRA. If the withholdings are not paid to the CRA before the due date, the PURCHASER may be subject to a penalty of 10% or 20% of the amount that should have been paid.
Let’s use a hypothetical sale of a Canadian house, purchased 15 years ago for $75,000, for $400,000 as an illustration of the selling process.
Step 1: The Buyer Will Set Aside $100,000 ($400,000 x 25%). The lawyer for the sale usually acts as trustee for this.
Step 2- Step 2 is the Certificate of Compliance filing by the Seller.
Step 3 – It involves the CRA demanding payment or acceptable security in the amount of $81,250 [($400,000 – $75,000) x 25%]. The remainder of the $100,000 withheld by the CRA was sent to the IRS by the Seller’s attorney (a sum of $81,250). Certificate of Compliance is issued by CRA.
Step 4 – Once the seller’s attorney has received a copy of the Certificate of Compliance, they will be able to release the remaining $18,750 [$100,000 minus $81,250] from the trust.
Step 5- The non-real resident’s tax due is around $55,000 when the return is finally filed after the end of the calendar year. The $26,250 non-resident receives is the result of subtracting $55,000 from the original $81,250.