How Does Disposing of a Canadian Property as a Non-Resident Work?
Canadian tax law allows non-residents to buy and sell properties. However, there are some considerations non-residents should be aware of. An individual can be considered a non-resident under the Income Tax Act if enough time has elapsed (183 days or more cumulatively in a year) between the date when the individual’s moved to another country and the property date of sale. The special considerations would apply once an individual has been considered a non-resident. This can be a long and complex process which can result in significant penalties; this is why you need proper guidance.
An Explanation of How Disposing of a Canadian Property as a Non-Resident Works
Under its tax laws, Canada has the right to tax the sale of a Canadian real estate. As a non-resident, the CRA (Canada Revenue Agency) and Revenu Quebec want to make sure they have enough “insurance” from the non-resident to cover the tax obligations if you he doesn’t comply with the necessary tax filings.
The non-resident is required to remit 25% (37.875% in the province of Quebec) of the capital gain realized on the property sold. The actual taxable capital gain (as opposed to the capital gain itself) is one half of the capital gain realized therefore, the tax is imposed on taxable capital gain, which is half of the capital gain realized. In most cases, it is beneficial to file Canadian tax returns at the end of the tax year because when you file a tax return to report the total realized gain and the taxable capital gain, the tax authorities will refund you a significant amount of the taxes they withheld. This process forces non-residents to comply with Canada’s tax obligations.
When a non-resident investor sells their Canadian real estate, the following process must take place:
When a non-resident sells a Canadian property, he has the obligation to file a request for Clearance certificates to the Canada & Quebec tax authorities. The accountant must provide the notary with a detailed calculation, indicating the base cost of purchase, resale price & show the amount of the income tax to be withheld and to be paid to tax authorities (named income tax installments, 25% for Canada, 12.875% for Quebec). The tax is levied on the amount of the total capital gain realized and not on the taxable capital gain.
The Clearance certificates request must be filed within 10 days after the property transfer. It then takes between 10 and 15 weeks for the tax authorities to issue the Certificates. Once they are received, the notary will disburse to the seller any supplementary amount held in trust. By law, the notary will hold 37.875% of the TOTAL SALE PRICE in trust until he receives the Clearance certificates, even if the property sale generated a loss. Some notary firms might hold a lesser amount.
The final settlement of tax on the disposition of properties is made when the vendor’s income tax return is assessed. The non-resident tax return should be filed for the taxation year in which the disposition took place. After the return is filed and assessed, any excess payment is refunded or provision is made for the release of security once the established debt has been satisfied.
For individuals, the income tax return is due on April 30 of the year following the year in which the disposition occurred. For corporations, the return is due six months after the end of the taxation year in which the disposition took place. Trust returns are due 90 days after the end of the trust’s taxation year in which the disposition took place. Returns that are filed late are subject to interest and applicable penalties.
Failure to comply with the requirements of CRA and Revenu Quebec when disposing a property as a non-resident, can result in the new owner of the property inheriting a tax burden. So it is important to engage the services of a professional accounting firm to guide you through this complex process to avoid penalties and complications.
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions. This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.