All non-residents selling Canadian real estate are required to undergo the same process. Without proper guidance, it can be a long and complex process and can result in significant penalties.
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 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 the 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.
What is the process?
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. 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.
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.
Assume you sold your 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].