As a non-resident, if you are considering selling your property located in Canada, you need to be aware of your obligations with respect to this sale so you can plan accordingly.
Non-residents of Canada are only subject to Canadian income taxes in certain situations. The disposition of taxable Canadian property, which includes land or buildings located in Canada, is one of these situations. Section 116 of the Income Tax Act requires you to inform Canada Revenue Agency of the sale no later than ten days after the closing date. This is completed by submitting a request for a certificate of compliance. Submitting this request in a timely manner can greatly reduce the amount of income taxes that will be withheld on the sale.
Purchasers of taxable Canadian property from a non-resident have an obligation to remit withholding tax to Canada Revenue Agency and this amount can be deducted from the purchase price. This is often 25% of the purchase price but can be 50% for certain properties. This withholding tax must be submitted to Canada Revenue Agency no later than 30 days after the end of the month in which they acquired the property. However, this amount can be reduced to 25% of your capital gain on the property if a certificate of compliance is received.
The request for a certificate of compliance includes all the pertinent details of the sale, a calculation of the capital gain on the sale, and all applicable supporting documentation. This commonly includes the documents listed below. This list is not exhaustive and other documents may be required depending on your specific situation:
Personal information for both the vendor and the purchaser, and their legal representatives.
The proceeds of sale, including a copy of the offer to purchase or the final sale agreement to support the amount.
Your cost base in the property, including supporting documentation. Supporting documentation would typically include the original purchase documents and invoices for any capital additions. Other documents may be required if you received the property as an inheritance or a gift, or if there was ever a change in use of the property.
The registered deeds on purchase and sale.
If the property was your principal residence at any point in time, you will need to provide Form T2091 Designation of a Property as a Principal Residence by an Individual.
If the property was a rental property at any point in time, you will need to provide capital cost allowance schedules for all years, or documentation to support that capital cost allowance was not claimed. You will also need to submit an additional form to calculate the recapture of capital cost allowance on the disposition, and 25% of the recapture will also need to be remitted to as a withholding tax.
Canada Revenue Agency will review the request and all supporting documentation. They will request payment for the calculated amount if they approve of the submission. This must be remitted by the purchaser or their legal representative, or adequate security must be provided to cover the amount owing. A certificate of compliance will be issued once payment or adequate security is received.
As mentioned above, the request is due no later than 10 days after the closing date. A penalty of up to $2,500 can apply to late-filed requests. However, it is advisable to submit this request at least 30 days prior to the disposition to ensure that you are not subject to excess withholding. It is also advisable to request a comfort letter as part of your request.
A comfort letter confirms that the request has been received by Canada Revenue Agency and allows the purchaser to keep the withholding tax in escrow until approval is received for the lesser amount based on the capital gain.
You will likely want to submit a Canadian income tax return for the year of disposition. Closing costs, such as commissions and legal fees, cannot be included in the capital gain calculation on the request. These amounts can be applied to reduce the capital gain on your tax return which will allow you to recover a portion of the withholding tax.
The above rules may also apply to other properties, such as property used in a business carried on in Canada, shares in certain private or public companies, or an interest in certain partnerships or trusts. We would be happy to provide additional details if any of these may apply to you.
Strict rules apply to dispositions of property by a non-resident and taxes must typically be paid to Canada Revenue Agency at the time of disposition. Submitting a request for a clearance certificate can minimize the withholding tax required and ensure you are not subject to penalties and interest.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA