Non-Resident Canadian Tax Clearance Certificates
People who are not Canadian Residents for Tax Purposes may be subject to a withholding tax when they sell Canadian property. All non-resident Canadian for tax purposes may be subject to this withholding tax if they sell real estate in Canada. This hold true if they own the property with someone else or as a part of a Canadian joint venture (JV) that owns property.
When selling your property, it is important that you follow the tax reporting rules set by the Canada Revenue Agency (CRA). This means filing all taxes and applying for a clearance certificate as soon as the property is sold. Without a clearance certificate, the purchaser of your property may be forced to withhold (hold back a portion of the sale proceeds) up to 50% of the amount the property sold for. To be clear, until a clearance certificate is produced, up to 50% of the gross sale proceeds may be held back. If a buyer fails to require the hold back, the buyer of your property may be personally liable for all the taxes you owe the CRA (Canada Revenue Agency). Talk to a lawyer BEFORE selling your home if you do not have have enough money to pay off all debts (ie mortgages) on your property AFTER the hold back is held back.
Section 116 of the Income Tax Act in Canada 116 requires that when non-residents sell taxable Canadian property, they must apply for a clearance certificate from the CRA. These rules surrounding the sale of the home by a non-resident can be very complex.
Read on to find out more information on tax reporting rules you MUST follow before, or immediately after, selling your property. (If you are a Canadian resident for tax purposes who owns property, these tax reporting laws do not apply to you).
Which Property Sales Must Be Reported To The CRA?
If you, or a joint venture partner of a property that you co-own the property with is a non-resident of Canada for tax purposes, the individual who is a non-resident is legally required to report the sale of taxable property to the CRA. Taxable property that must be reported include:
• real property located in Canada (such as houses and condos);
• Canadian life insurance policies;
• resource-based property;
• shares of corporations and mutual funds, provided that 25 percent of the outstanding shares are being sold.
There are certain kinds of properties owned by non-residents that do not need to be reported if sold. Examples include shares, mutual funds and bonds that are listed on a stock exchange. For a full list of Canadian properties that do not need to be reported, this links you to the Government of Canada List of included and excluded properties for reporting purposes.
What Non-Residents Selling Property Must Do?
Within 10 days of the sale closing, you must notify the Canadian Revenue Agency (CRA) by completing any of the following related forms to obtain a clearance certificate. It is best to get the clearance certificate before the sale completion date or risk having the sale proceeds withheld. Allow yourself at least 10 – 12 weeks to get the clearance certificate.
The holdback amount is:
• 25% of the sale price if the property is capital property, meaning it never generated income, is not a rental property and was occupied by family members for personal use.
• 25% of the sale price related to the land value plus 50% of the purchase price related to the building value, if the property is rental property or depreciable property, meaning that it was used as rental property or generates income.
The buyer of your property can be on the hook for any outstanding Canadian taxes owed. While the hold back is usually held by the lawyer for the seller, it is an obligation imposed by the buyers’ lawyer until a clearance certificate is received.
Why Is A Clearance Certificate Required?
A clearance certificate tells all the parties involved in the sale of the property that enough taxes have been remitted (paid) to the CRA and the profits of the sale can be transferred out of Canada.
When assisting with selling property owned by a non-resident, real estate lawyers will often hold 25 per cent of the sale proceeds until you obtain a clearance certificate. Any amount of the sale proceeds withheld beyond this, such as closing costs like realtor commissions and repayment of mortgage, are released to you once the deal is closed.
As soon as the clearance certificate is obtained, the remaining funds will be released to the non-resident seller.
The Legal Obligations Of A Non-Resident of Canada With Rental Property
Are a non-resident of Canada and own property but are renting it out to make money? There is a 25% Canadian withholding tax that is applied to the gross monthly rents you receive from your tenant. In other words, a non-resident is legally obligated to remit this tax to the CRA either on or before the 15th day of each month following the month you receive the rental income. Usually, if you do not reside in Canada, your property manager will collect the rent and remit the withholding tax for you.
If you have not filed a yearly tax return on the rental income generated by the property you want to sell, you must file the past returns before applying for a Clearance Certificate.
Non-Residents Owning Rental Properties May File A CRA Tax Return Annually
As a non-resident, you can file a Section 216 Return. This is optional. This form is basically a personal income tax return that you use to report the net rental income received from your properties that you have rented out in Canada. The amount you are taxed is based on graduated rates that apply to Canadian residents and is reduced by the 25% withholding tax you have previously remitted. Any extra withholding tax that CRA gets from you is refunded through this return. Usually, non-residents only file this when they are expecting to get a refund.
Obligations Of Canadian Residents With Rental Property Co-Owned With A Non-Resident
If you are co-own rental property with someone who is non-resident of tax purposes in Canada, the individuals who are non-residents are legally required to separately report his/her share of the gross income and expenses related to the property. Note: these tax reporting requirements do not apply to a Canadian owner’s share.
Required Forms For Non-Resident Sellers To Get A Clearance Certificate?
To get a clearance certificate, fill out one of the applicable forms:
• Form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property
• Form T2062A: Request by Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Real Property; Canadian Resource and Timber Resource Property or Depreciable Taxable Canadian Property.
• Form T2062B: Notice of Disposition of Life Insurance Policy in Canada by a Non-Resident of Canada
You should hire an accountant to help you prepare these forms to make sure that the calculations are correct. Generally, other information should be attached to these forms. Including the Purchase/Sale Agreement related to both the original and the current sale of the property, copies of filed Section 216 Returns, and any other payment of taxes you need. You do not have available funds to pay your taxes? CRA may accept other forms of security in place of the money owed for taxes.
What Is My Tax Number Used to File for a Clearance Certificate?
When notifying the CRA about the sale of your property, make sure you input your Canadian Taxation Number. If you were previously a resident of Canada, this tax number should be your Social Insurance Number (SIN). In the case you forgot your SIN, then state this on the form along with your last known address prior to emigrating from Canada, date of birth and full legal name.
If you have never had a SIN but have previously filed a Canadian tax return, you may use your temporary tax number or your individual tax number if one was assigned to you.
People who never had a tax number in Canada must fill in form T1261. This is the application for a Canada Revenue Agency Individual Tax Number (ITN) for non-residents. Make sure to send your form to the CRA well in advance of the sale of the property.
If the sale is completed by a corporation rather than an individual, CRA will give you a business number rather than an individual tax number instead. If you do not have a business number, you may apply for one using the Business Registration Online Service.
You must quote your tax number in all correspondence and payments to the CRA. If not, you risk experiencing a delay in getting your certificate of compliance.
Where Are Completed Forms Sent?
All the forms and accompanying documents must be sent to the Tax Services Office that is nearest the location of your property. Once the CRA receives all the appropriate tax reporting, documents and outstanding payments, you will be issued a T2068, a Clearance Certificate.
Buying Property in Canada From a Non-resident?
If you buy real estate from a foreign (non-resident Canadian for tax purposes) seller and they have not paid their taxes, you may be responsible for all the taxes the seller owes! How do you find out the status of your seller’s residency? Ask! The burden is on you, the buyer, to ask reasonable questions to your seller to find out his/her residency status.
To lower the risk of being on the hook for the non-resident seller’s unpaid taxes, make sure that the seller’s lawyer has held back sufficient money until the clearance certificate is issued. If it turns out that taxes are indeed owed, the amount from the hold back funds will be remitted to the CRA.
If you are a non-resident of Canada and wish to sell your property, regardless if it is income-earning or not, call Kahane Law Office in Calgary to discuss your situation. We will explain what you need to do when selling your property to ensure a smooth transaction.
Getting Help With A Clearance Certificate To Avoid Withholding Tax In Canada
Selling a home as a non-resident of Canada for tax purposes and need a clearance certificate? Buying a home from a non-resident and want to be protected? The real estate lawyers at Kahane Law Office are able to help. Call today at 403-225-8810 in Calgary, Alberta. You can also reach us toll-free by calling 1-877-225-8817 or you may email us here directly.