Holdbacks For Non-Residents Owning Canadian Real Estate
Any non-resident, for Canadian Income Tax purposes, individual or corporation selling real estate in Canada, is subject to a holdback. Non-resident real estate holdbacks are part of tax laws, so the Canadian government receives taxes owing from non-residents. This withholding tax is held until the Canada Revenue Agency issues a clearance certificate. The law requires buyers to maintain non-resident real estate holdbacks. In reality, it is usually the seller’s lawyer who holds the funds under an undertaking. If you are a non-resident buying or selling a home, the real estate lawyers at Kahane law Office can help.
Why Residency Matters When Selling Real Estate In Canada?
In October of 2017, we posted an article on Non-Resident Canadian Tax Clearance Certificates. It explained that people not resident of Canada, tax wise, are subject to a withholding tax when selling Canadian property. This obviously has massive implications when a non-resident seller wishes to dispose of their home. If not enough money from the sale proceeds, or from other sources, to withhold the required amount plus pay for all closing costs, then closing delays occur and potentially fall through. It is important to know the laws of the Income Tax Act of Canada (the “ITA”). It is also important to understand what sort of closing costs a non-resident seller might be up against.
What Happens With A Non-Resident Of Canada?
When selling a property, the sale price less any deposits already paid by the buyer (plus or minus any adjustments for items such as property taxes, condo fees, etc.) is to be transferred from the buyer’s lawyer to the seller’s lawyer on the closing date. The seller’s lawyer is then responsible for paying out the balance of real estate commissions, legal fees, as well as any mortgages or other financial registrations on title. Typically, the seller’s lawyer releases net sale proceeds to the seller.
With a non-resident seller, the seller’s lawyer holds up to 50% of the sale price. We hold the holdback until the Canada Revenue Agency issues a clearance certificate. There is more on this below. If there is not enough sale proceeds to cover closing costs and the hold back, the seller has two options. They may provide the shortfall amount or hope the purchaser is okay postponing closing until obtaining a clearance certificate.
Requirements For Non-Resident Real Estate Holdbacks In Canada?
There is disagreement among real estate professionals and accountants in terms of the holdback amount on closing. Some industry members believe only 25% of the sale price forms the holdback if the property includes a principal residence status. Further, that there is a 50% holdback if the property was income generating. Unfortunately, there is nothing in the ITA which distinguishes between income generating property and non-income generating property.
Note that upon emigration from Canada, effectively all properties previously used as principle residences become investment properties. A non-resident cannot trigger their principle residence exception. If a clearance certificate is not issued by the closing date, there is a holdback of 50% of the sale price. Do not panic yet! The withholding amount of non-resident real estate holdbacks is not the amount of tax. It is a placeholder to ensure payment of funds owing. Your tax owed will vary depending on your capital gain, other tax situations and your country of residence. There are different treaties with different foreign countries.
How To Mitigate Closing Issues For Non-Residents?
If you’re a non-resident looking to sell your home in Canada and you’re concerned about not having enough money to close with the required hold back, you can:
Leave Lots Of Time To The Possession Date
You can try to arrange a closing date that is at least 3 months away. Issuing a Clearance certificates typically takes up to three months after making an application, so this usually gives enough time to obtain a clearance certificate prior to the closing date. As with all government document processing, this is not a guaranteed return time. Prepare to wait longer in case it takes longer. Three months is the typical time to receive it. Without, clients face non-resident real estate holdbacks.
Apply For A Proposed Disposition Clearance Certificate
If you do not have a buyer yet, you can make an application for a proposed disposition to get ahead of wait times. On receiving a clearance certificate regarding a proposed disposition, the hold back requirement drops to 25% of the sale price. In this case, once you sold the home, you make a second application for the actual disposition. At that point, once the CRA issues a clearance certificate with respect to the actual disposition, the lawyers release the remaining 25%.
Negotiate With Buyer
If you already signed a sale agreement and think the Canada Revenue Agency will issue a clearance certificate prior to closing, discuss the matter with your lawyer to allow for pro-activeness to see if the buyer is willing to push out closing until a certificate is obtained. While contracts are binding, many buyers are willing to wait if they love the home and there has not been a significant shift in the real estate market.
Getting Help With Non-Resident Real Estate Holdbacks
Non-resident’s selling property in Canada and are facing non-resident real estate holdbacks should call Kahane Law Office in Calgary to discuss their situation. It is always best to call before even listing your property to ensure a timely closing. Here is the form for the CRA for your use. We explain in detail what to do when selling your property to ensure a smooth transaction. Call today at 403-225-8810 in Calgary, Alberta or we can be called toll-free by calling 1-877-225-8817 or you may email us here directly.