All non-residents selling Canadian real estate are required to undergo the same process and face the same tax implications. Without proper guidance, it can be a long and complex process and can result in significant penalties.
Crowe MacKay’s tax expert, Emily Richmond, shares what tax implications you could face when selling your property as a non-Canadian resident.
Non-resident withholding tax
If you are looking to sell your house, condo, or any other property, you are subject to Canadian non-resident withholding tax.
Canada has the right under its tax laws, and under most Income Tax Treaties with other countries, to tax the sale of your Canadian real estate. Because you are not a resident in Canada, the Canada Revenue Agency (“CRA”) wants to ensure it at all times has sufficient “security” from you to cover your taxes owing, in case you decide to not comply with the required tax filings. To do so, the CRA requires the purchaser to withhold 25% (or 50% in some cases) of the sale price. Though this is not the final tax owing.
Through the process of applying for a “Certificate of Compliance," the CRA will request a withholding tax payment of 25% of the NET capital gain instead of 25% of the sales price. This is still not the final tax owing. By filing a Canadian T1 tax return reporting the net gain, you will be entitled to a significant refund of the amount of taxes withheld by the CRA, since on this filing you can claim our selling outlays, as well pay tax at Canada’s marginal tax rates, which is typically well under the 25% tax withheld. In effect, the process forces you to comply with your tax obligations; otherwise, you’ll be donating a significant sum to the Canadian government.
Crowe MacKay's tax advisors help non-resident sellers in completing the necessary documents and estimating the capital gain and tax payments. If you require assistance, connect with us in Alberta, British Columbia, Northwest Territories, or the Yukon.
What is the process of selling a property?
Step 1 – Purchaser is required to withhold 25% (or 50% in some cases) of the total purchase price.
Step 2 – Seller must let the CRA know about the sale or proposed sale by filing for a Certificate of Compliance, completing the applicable form (T2062 or T2062A). These are due no later than 10 days after the actual sale. The penalty for late filing is $25 per day to a maximum of $2,500, even if no taxes are owing. If the property is jointly held, then multiple penalties will apply to the property taxes.
Step 3 – The CRA will request payment or acceptable security to cover the resulting taxes payable and issue a Certificate of Compliance. Our experience is the CRA is currently taking about 4 months to process the forms and issue Certificate of Compliance, though this timeline can vary by Province.
Step 4 – Upon receipt of a copy of the Certificate of Compliance, the purchaser can release the amounts withheld from Step 1 to the non-resident.
Step 5 – After the end of the calendar year, the non-resident is required to file a Canadian tax return to report the sale.
Note: If the purchaser does not receive the Certificate of Compliance or a “comfort letter” from the CRA, they are required to remit the amount withheld from Step 1 to the CRA within 30 days after the end of the month in which the property was purchased. Failure to remit the withholdings to the CRA by the due date may result in a penalty to the PURCHASER equal to 10% or 20% of the amount that was required to be remitted.
Selling process example:
Assume the seller sold a Canadian real property for $400,000 and originally paid $75,000 15 years ago.
Step 1 – Purchaser will withhold $100,000 [$400,000 x 25%]. Typically, this is held in trust by the seller’s lawyer.
Step 2 – Seller files for Certificate of Compliance.
Step 3 – The CRA will request payment or acceptable security of $81,250 [($400,000 - $75,000) x 25%]. Seller’s lawyer remits the $81,250 out of the $100,000 originally withheld to the CRA. CRA issues Certificate of Compliance.
Step 4 – Upon receipt of a copy of the Certificate of Compliance, the seller's lawyer can release the remaining funds held in trust of $18,750 [$100,000 – 81,250].
Step 5 – After the end of the calendar year, upon the filing of the non-resident tax return, the actual tax liability is approximately $55,000. The non-resident receives a refund of $26,250 [$81,250 – 55,000].
Does the Underused Housing Tax (“UHT”) apply to me?
As a non-Canadian citizen or permanent resident of Canada owning property in Canada you would be considered an “affected owner”, thus requiring you to file the UHT return for each year, due by April 30 of the following year. There MAY be an exemption from the tax depending on your situation, however you STILL NEED TO FILE A RETURN TO CLAIM AN EXEMPTION BY THE DUE DATE!
There are significant penalties for affected owners who fail to file an annual return when it is due, with a minimum penalty of $5,000 for individuals who are affected owners, and $10,000 for owners other than individuals.
CRA can decline a request for a Certificate of Compliance if the non-resident seller is not in full compliance with their UHT tax and reporting obligations for all periods up to the date of sale.
Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Contact your Crowe MacKay advisor for more information.
If you are looking for Tax Services, Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.
