Any person purchasing Canadian real estate from a non-resident may be surprised to learn that they have an obligation to withhold and remit to the Canada Revenue Agency (“CRA”) 25% of the gross sale proceeds with respect to the purchase. This liability can increase to 50% where the property was depreciable property or where the real estate was held by the non-resident as other than capital property (i.e. for speculative purposes). A purchaser who fails to withhold this tax is liable for it (unless you can prove that you had no reason to believe the non-resident was not a Canadian resident).
The withholding requirement can be reduced if the vendor obtains a “Certificate of Compliance” from the CRA. This is done by filing a form with the CRA in advance of the sale of within 10 days after, with evidence as to what the sale proceeds are and what the vendor’s adjusted cost base is. If done correctly, the CRA will allow the withholding to be calculated at 25% (or 50% as per above) of the gross sale proceeds less the adjusted cost base of the property. In this situation if the vendor’s cost is greater than the proceeds, the withholding tax requirement is eliminated.
A Certificate of Compliance is required any time that a disposition by a non-resident occurs. This includes where a non-resident gifts property regardless of whether or not a gain is realized on the property. In the case of gifts, the proceeds will be determined to be fair market value at the time of the gift. In the case of death, there is no compliance required on this “deemed” disposal by the non-resident; however, the executor acting on behalf of the deceased will need to file a tax return for the deceased to report the gain or loss on disposal.
- The CRA will typically recognize a principal residence designation so in the case of a non-resident who was formerly a resident of Canada who is selling a former principal residence, there may be a reduction in the withholding requirement.
- A Certificate of Compliance may take 6-8 weeks to receive, so typically the vendor’s lawyer will agree to hold the required percentage of the gross proceeds in trust pending receipt of the Certificate.
- Although the purchaser has a statutory commitment to remit the withholding tax within 30 days after the end of the month following closing, this requirement is not enforced by the CRA where the Certificate of Compliance has been filed on a timely basis.
- The process as outlined above constitutes only the withholding tax requirement. A non-resident will still need to file a Canadian tax return by April 30 of the following year to determine the actual Canadian income tax liability.
- In the case of a non-resident landlord, there is still a withholding tax requirement and (usually 25%) a percentage of the gross rent needs to be remitted to the CRA on a timely basis (A form NR6 may be filed to reduce this liability).