For non-residents of Canada, the purchase of real estate in Canada can be pretty straight forward. However, it is important to fully understand the tax implications when the time comes to sell the property.
Real property situated in Canada is considered taxable Canadian property (TCP). As a result, non-residents of Canada may be subject to tax under the Income Tax Act on gains from the disposition of TCP.
You can expect the purchaser to withhold 25% of the proceeds from the sale on closing. As the seller, you will have to apply for and receive a Certificate of Compliance in order for the withholding tax to be reduced to 25% of the capital gain (proceeds less adjusted cost base). To apply, a Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) should be filed with the Canada Revenue Agency (CRA). This form should be received no later than 10 days after the date of disposition. A $25 a day penalty would be applied on a late submission.
Be prepared to submit the offer to purchase, the purchase agreement from when you purchased the property, the registered deeds from the original purchase, and an itemized list of any capital improvements performed on the property. CRA is likely to ask for the backup to support some of your larger costs.
Additional forms may need to be filed depending on the circumstances. These may include Form T1261 (Application for a CRA Individual Tax Number (ITN) for Non-Residents) and/or Form T2062A (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource or Timber Resource Property, Canadian Real Property (Other than Capital Property), or Depreciable Taxable Canadian Property).
After the certificate of compliance is issued by CRA, the purchaser will remit 25% of the capital gain to CRA as a withholding tax, the remainder can be transferred to the seller. You will be required to file a non-resident return for the year reporting the sale of the property. Outlays and expenses related to the sale of the property (i.e. legal fees and real estate commission) will be included on this return. You will receive a credit on this return for the 25% withholding tax from the sale.
It is important to understand the road that lies ahead as a non-resident owning Canadian real estate. Understanding your obligations will help you plan accordingly prior to the sale and in the months that follow.
If you have any questions regarding real estate sales by non-residents, please contact Brendan McCann at (647) 508-5555 ext. 102 or by email at email@example.com.