As a non-resident, a little bit of extra tax planning is required when selling Canadian real estate.
The 25% Withholding Tax
The CRA requires that the purchaser withhold 25% of the gross sale amount from a non-resident. (Note that the 25% of the gross sale proceeds withheld would normally be in the seller’s lawyer’s trust account, and this individual has the undertaking of releasing the funds to the CRA and the balance to the seller once the Certificate of Compliance has been obtained from the CRA.)
This means that if a non-resident seller does not plan ahead, this 25% of the gross sale would be forwarded to the CRA and it would remain there until the non-resident seller files a tax return for the year of the real estate sale.
The seller can reduce the withheld amount by filing a T2062, which is a request for a Certificate of Compliance or the Clearance Certificate with the CRA. This document can be filed for either a proposed sale or a completed sale, but must be filed within 10 days of the date of disposition. This form requests relevant identification information as well as the documents required to calculate the seller’s anticipated capital gain from the sale. Upon the approval of this request, only 25% of the expected capital gain needs to be remitted to the CRA. When CRA receives 25% of the expected capital gain, a Certificate of Compliance will be issued to the non-resident. At this time, the purchaser can release the balance of the remaining funds to the non-resident. (As noted in paragraph 2, these funds are generally in a trust account of the seller lawyer who will disburse accordingly.)
Tax Refund
For the year in which Canadian real estate is sold, a non-resident seller has the option to file a Canadian tax return to determine the actual taxes owing for the gains made on the sale. In most cases, by filing this return, the seller will receive a tax refund from the CRA. This is because the tax filing and the selling costs (which can be significant) are deducted from the sale proceeds in the calculation of the gain for tax purposes. Non-residents also benefit from our progressive Canadian tax rates. The 25% withholding tax on the net gain is higher than the highest tax bracket in which capital gains are taxed; this means that a tax refund is practically a certainty if the non-resident files a tax return.
Avoid Being Shortchanged
The reason for the complexities behind non-resident real estate transactions is because the CRA needs a process that will ensure non-residents to comply with Canadian tax obligations. However, if the process is understood and followed, non-residents can avoid being shortchanged in the process of selling their Canadian real estate.
Related Cross Border Tax Consulting Posts
- Moving Abroad & Cutting Ties to Canada for Lower Taxes (Part 1)
- 6 Tax Factors for Non Residents with Canadian Rental Income
- Real Estate Gains & Canadian Income Tax, A Brief Analysis
- Big Tax Deductions vs Deductions that Are More Fuss than Their Worth
- Canadians & the US Foreign Account Tax Compliance Act (FATCA)
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