Non-resident investors have played an integral part in Canada’s thriving real estate market, however, one consideration when thinking about purchasing Canadian real estate if you are a non-resident of Canada is the tax payable when the property is eventually sold.
When these investors finally decide to sell, the Canada Revenue Agency (“CRA”) wants a portion of the investment profit and therefore the seller must pay income tax on any gain. The tax rules surrounding this process are complex, and if not followed properly, can result in a very significant tax liability.
Section 116 of the Income Tax Act requires payment of withholding tax. The non-resident must obtain a clearance certificate from CRA before the funds leave Canada. The clearance certificate certifies how much tax is payable to CRA. It is important for all parties involved to make sure this is done because if the certificate is not obtained, the responsibility shifts onto the purchaser to remit to CRA either 50% of the purchase price for depreciable property or 25% of the purchase price for other capital property.
Efforts should be made to obtain the clearance certificate on or before the completion date. The clearance certificate can be applied for as soon as the subjects are waived or removed and the sale is binding. If the clearance certificate is not issued by the completion date, the purchaser of the property is required to withhold (meaning holdback a portion of the sale proceeds) the amount of the holdback is either:
- if the property is capital property (never generated income and was occupied by family members for personal use) and is not rental property, 25% of the purchase price; or
- if the property is not capital property, but rather, rental property (or income-generating property) or depreciable property whether or not depreciation was ever claimed by the seller, 25% of that portion of the purchase price relating to the land value plus 50% of the purchase price relation to the building value;
and eventually to remit a percentage of the purchase price on behalf of the non-resident to CRA. Some things to keep in mind:
- The holdback is mandatory;
- The seller should retain an accountant for the transaction (and for the annual income filings);
- The holdback amount is between 25–50% of sale price, not profit;
- Allow 10–12 weeks to obtain Clearance Certificate (or longer);
- The Clearance Certificate can ONLY be applied for once subject conditions have been removed;
- The non-resident’s accountant usually makes application for client, not the lawyer. It is recommended to consult with an accountant who is knowledgeable in making these applications;
- It is preferred that there be a lengthier than normal period between the subject removal date and the completion date, to ensure that a clearance certificate is issued prior to the completion date, thus avoiding the need for a holdback;
- Non-residents should file annual income tax returns regarding the rental income generated by the property. If they have not done this, past returns must be filed before a Clearance Certificate application can be completed;
- Tax is payable from sale proceeds;
- Once a Clearance Certificate is received, the balance of funds can be released to the non-resident seller;
- It is common for the seller’s lawyer to holdback the money through normal undertakings, it is ultimately the purchaser’s responsibility to ensure that sufficient money is held back; therefore, the purchaser has final say as to amount of the holdback, although the purchaser’s position should be reasonable;
- If there is doubt as to the type of property, a higher holdback is suggested;
- The holdback amount is set by the sale price, and is never reduced because the equity in the property is less than the required holdback. Sellers may be required to pay money to the lawyer’s trust account to clear title on a sale and provide sufficient funds for the requisite holdback if there is not sufficient equity in the property; and
- The application for the Clearance Certificate must be made within 10 days of the completion date.
Author: Jaime M. Boyle
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of real estate law at the following:Una Gabie: firstname.lastname@example.org Jennette Vopicka: email@example.com Danielle (Dani) Brito: firstname.lastname@example.org Jaime Boyle: email@example.com