Income Tax Implications for Non-Resident Selling and Buying Real Estate in Canada.
It is quite common for non-residents / U.S citizens who do not live in Canada to own Canadian property. These non-residents may do this for a variety of reasons; perhaps they want to own a second home in Toronto; or, perhaps, given the price, owning Canadian property presents itself as a terrific investment opportunity. Whatever the reason, it is important to know about the tax implications that arise when these non-residents, including U.S citizens, decide to sell this property. Section 116 of the Income Tax Act sets out rules and obligations on both the non-resident seller and the subsequent purchaser.
An Overview of Section 116
Section 116 institutes a non-resident withholding tax regime on the sale of Canadian property by non-residents. When acquiring taxable Canadian property (e.g. real property situated in Canada, shares of private corporations only if they certain criteria, and other property defined in s. 248(1) of the Income Tax Act) from a non-resident, the purchaser is required to withhold 25% (or 50%, in certain cases) of the purchase price to cover the non-resident's potential Canadian income tax liability. This is done to ensure that every sale concerning taxable Canadian property will be subject to the same property capital gains tax obligations. As the amount remitted does not necessarily represent the non-resident seller’s actual income tax liability, the non-resident seller can attempt to recoup any excess from the Canada Revenue Agency after it files a Canadian income tax return to report the sale.
Statutory Obligations on the Purchaser
Section 116 sets out various obligations on the purchaser of the taxable Canadian property. Not only must the purchaser withhold 25% of the purchase price, he or she is also obligated to remit that amount to the Canada Revenue Agency within 30 days of the sale, subject to certain exemptions. The purchaser is relieved from the withholding obligation if it receives a clearance certificate from the non-resident vendor. The tax clearance certificate is issued by the CRA, and confirms that the CRA has received the required information and adequate non-resident withholding tax from the vendor. If the purchaser does not withhold and/or remit, unless a tax clearance certificate has been issued, the purchaser is liable to pay the unremitted amount, plus any interest and penalties.
The Tax Clearance Certificate
To obtain the Tax clearance certificate, a non-resident seller must notify the CRA, within 10 days of the sale, about the identity and address of the non-resident seller; the property being sold, including a description of it; and financial figures, including the sale price and the non-resident seller’s income tax obligation.
Additionally, before the tax clearance certificate will be issued, the seller (not the purchaser) must remit (i.e. pay) 25% of the gain realized on the sale to the CRA, as the tax clearance certificate process transfers the remittance obligation from the purchaser to the seller. After receiving payment and the information set out above, provided in the request form supplied by the CRA, the CRA will issue a tax clearance certificate to the vendor. Giving a purchaser a tax clearance certificate signifies that all of the reporting and remitting obligations are complete, relieving the purchaser of its non-resident withholding obligations.
Non-resident purchasing Canadian property?
Are you a non-resident who is purchasing Canadian property? Are you a Canadian who is purchasing a Canadian property from a non-resident? Are you unsure if you are meeting your non-resident tax remittance obligations to the Canada Revenue Agency? The accountants at Tax Doctors Canada are highly trained professionals in the field on non-resident / U.S Canada income tax services and can help you determine your precise obligations as either a purchaser or a non-resident seller.
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