Tax Implications for Non-Resident Transactions

By Mirjana (Mira) Markovic

Dear Friends,

I hope that you are all doing well and staying safe during these uncertain times. I know that we are all looking forward to getting back to our “normal” lives and never having to look back to the past few years.

As a result of the pandemic, I have seen many people relocate to a different country. Individuals leaving Canada will have additional tax responsibilities once they exit Canada if selling Canadian real estate after moving to a different country. We will be discussing some tax implications from both the sellers’ and the buyers’ perspectives[1].

An individual is considered to be a “non-resident” of Canada for income tax purposes in the following circumstances:

• normally, customarily, or routinely live in another country and are not considered a resident of Canada;
• do not have significant residential ties in Canada and if any of the following applies:

• you live outside Canada throughout the tax year;
• you stay in Canada for less than 183 days in the tax year.[2]

You can be a Canadian Citizen and still be considered a non-resident. As a non-resident who owns property in Canada, the CRA will take the proper steps to ensure that it has security from you to cover the taxes you owe.  Non-residents are also required to pay tax on any gain realized on the sale of their property to the CRA. To “satisfy” the buyer that proper tax will be remitted to the CRA, the seller is required to obtain a Tax Clearance Certificate. If the seller can obtain a Tax Clearance Certificate before the completion of the sale, the tax owed will simply be deducted from the sale proceeds and remitted directly to the CRA by the seller’s lawyer. If the seller is unable to obtain a Tax Clearance Certificate before the completion of the sale transaction, the CRA requires the buyer to withhold 25% of the gross purchase price or 50% where the real estate is a depreciable property (i.e. a building used for rental or business purposes), which the seller’s lawyer shall hold in trust on behalf of the CRA, until the seller receives the Tax Clearance Certificate. To simplify, I will discuss the process below in light of s.116 of the Income Tax Act (“ITA”).

The Process

Step One:

The ITA places an obligation on the buyer to make a reasonable inquiry as to the residency of the seller. Such standard is that “after reasonable inquiry, the buyer had no reason to believe that the non-resident seller was not resident in Canada”.

Subparagraph 17(a) of the OREA Agreement of Purchase and Sale (“APS’), contains the seller’s warranty that the seller is not a non-resident and will not be a non-resident on completion of the transaction unless notice to the contrary is provided. As part of closing, sellers are required to execute a statutory declaration indicating that the seller is “not a non-resident” at the time that the property was sold and at the completion of the sale transaction. The buyers will rely on such declaration from the seller. If the seller was a non-resident at the time the property was sold, the seller must apply for the Certificate of Compliance (“Tax Clearance Certificate”) using the CRA form T2062. The cause for the Tax Clearance Certificate and the holdback is based on where the seller “permanently resides” and not whether the seller is a Canadian Citizen.

The buyer’s lawyer must ensure that their client obtains from the seller either a Tax Clearance Certificate before the completion of the sale transaction or withhold the appropriate amount of the purchase price, to prevent the buyer from becoming liable for the tax payable by the non-resident seller. The buyer shall withhold 25% of the gross purchase price or 50% where the real estate is a depreciable property (i.e. a building used for rental or business purposes).

Step Two:

S.116 (3) of the ITA requires the non-resident seller to notify the CRA of the sale by filing for a Certificate of Compliance (“Tax Clearance Certificate), no later than 10-days after the disposition of the property[3]. If the seller fails to file for a Clearance Certificate within the said prescribed time, then a penalty of $25.00 per day to a maximum of $2,500.00 shall be payable by the seller. Multiple penalties shall apply to properties held jointly.

The withholding tax requirement may be reduced if the seller can obtain the Tax Clearance Certificate before the completion of the transaction and provide the same to the buyer. Therefore, as I indicated above, both the buyer and the seller should retain a professional chartered accountant and have him/her involved from the onset of the transaction.

Step Three:

The CRA will request payment or acceptable security to cover the resulting taxes payable and then proceed to issue the Tax Clearance Certificate. The CRA can take anywhere from 8-12 weeks or longer to issue the Tax Clearance Certificate, therefore this process should be initiated well before the closing date. If this is not possible, the buyer’s lawyer can arrange through an undertaking with the seller’s lawyer to holdback 25% or 50% of the gross purchase price of the property. Appropriate terms should be set out in the undertaking by the seller’s lawyer to withhold the appropriate amount in trust for the CRA until the buyer’s lawyer receives the Tax Clearance Certificate and any tax is paid.

Prior to releasing the holdback, the seller’s lawyer should request that the CRA issue a “Comfort Letter”, wherein the CRA confirms that the non-resident’s taxes are in good standing. The CRA will not issue a Comfort Letter unless the non-resident seller has submitted the T2062 form. The Comfort letter allows the seller’s lawyer to retain the withheld funds (i.e. 25% or 50% of the purchase price) without any interest or penalties. Once the seller’s lawyer receives the Comfort letter, they are obligated to provide the same to the buyer’s lawyer.

Step Four:

Once the seller’s lawyer receives the Tax Clearance Certificate, the withheld amount (i.e. 25% or 50%) can be released to the non-resident. However, if the buyer is not in receipt of the Tax Clearance Certificate or a Comfort Letter from the CRA, either 25% or 50% that was withheld shall be remitted to the CRA within 30-days after the end of the month in which the property was purchased to satisfy the buyer’s obligations to the CRA, s.116 (5)[4]. Please be mindful that if the appropriate amount is not remitted to the CRA within the said prescribed time, it may result in a penalty to the buyer equal to 10% or 20 % percent of the amount that was required to be remitted.

Step Five:

The non-resident seller shall file a tax return in the year of the sale to account for the same.

Example

Jorge, a non-resident sold his Canadian property to Mila for $500,000.00, but originally paid $80,000.00 25 years ago.

Step One:

Mila takes reasonable steps and determines that Jorge is a non-resident and that he is selling his residence and not a rental or business property. Now, we can determine that 25% of the purchase price needs to be withheld.

$500,000.00 x 25% =$125,000.00 (this amount is to be held in trust by the seller’s lawyer on behalf of the CRA)

Step Two:

Jorge retains a very knowledgeable and experienced accountant and files T2062 under S.116 (3) for the Certificate of Compliance (“Tax Clearance Certificate) no later than 10-days after the disposition of the property. The withholding tax requirement may be reduced if the seller can obtain the Tax Clearance Certificate before the completion of the transaction and provide the same to the buyer.

Step Three:

The CRA will request payment or acceptable security to cover the resulting taxes payable and then will issue the Tax Clearance Certificate.

            $500,000.00 -$80,000.00 x25% = $105,000.00

The seller’s lawyer will remit $105,000.00 out of the $125,000.00 to the CRA. The CRA will issue a Tax Clearance Certificate at this time.

Step Four:

Once the Tax Clearance Certificate is received, the seller’s lawyer can release the remaining funds held in trust to the non-resident.

$125,000.00-$105,000.00=$20,000.00

Step Five:

After the end of the calendar year, and upon the non-resident filing a non-resident tax return, the actual tax liability will be calculated and the non-resident will receive the appropriate refund.

So, if the tax liability was $55,000.00, the non-resident would receive the refund as follows: $125,000.00-$55,00.00=$70,000.00

*Sellers must be aware that they may need to provide additional funds to close the transaction if there are encumbrances against the title of the property, which must be paid in full and discharged on closing (i.e. mortgage or lien), and the equity in the sale is not enough to discharge the encumbrance and provide the holdback amount.

Conclusion

My dear friends, I hope that this article has provided you with some helpful information if you are considering being involved in a transaction involving a non-resident of Canada.

Until next time, take care of yourselves.

*This article does not contain tax advice and every effort has been made to ensure its accuracy. A professional chartered accountant must be retained for tax advice and to assist from the onset for such a transaction.