Implications for Non-Residents Selling Residential Property in Canada

Written by: Roshan Kalra

The sale of residential property in Canada by non-residents involves a complex interplay of tax implications and legal considerations. Understanding these nuances is essential to ensure compliance and avoid unexpected liabilities. Here, we explore key implications non-residents should consider when selling property, particularly focusing on prescribed holdbacks mandated by the Income Tax Act.

1. Understanding Non-Resident Tax Obligations

When a non-resident sells residential property in Canada, they are subject to specific tax regulations. The primary concern is the potential capital gains tax on the profit from the sale. Non-residents are liable to pay tax on gains realized from the disposition of taxable Canadian property, which includes most types of real estate.

2. The Role of the Income Tax Act

Under the Income Tax Act, there are requirements for non-residents to report the sale of Canadian property. Specifically, the Act stipulates that the vendor must either obtain a clearance certificate from the Canada Revenue Agency (CRA) before the sale closes or, if not obtained, a portion of the sale proceeds must be withheld. This withholding acts as a safeguard for the CRA to ensure that taxes owed are paid.

3. Prescribed Holdbacks

When selling property, if the vendor does not apply for a clearance certificate, the purchaser is required to withhold a prescribed percentage of the gross proceeds. As of recent guidelines, this is typically 25% of the sale price for residential properties. This holdback ensures that there are funds available to cover any tax liabilities that may arise from the transaction. From a practical standpoint, vendor counsel will typically holdback such amount until their vendor client furnishes the clearance certificate. It is important for vendors to understand that the holdback is applied on gross sale proceeds, thus they should ensure in advance that they have the requisite funds available should the holdback create a shortfall in completing closing payouts (e.g., mortgage payouts, realtor commissions, legal fees).

4. Obtaining a Clearance Certificate

To avoid the holdback, the non-resident vendor can apply for a clearance certificate from the CRA. This certificate confirms that all taxes related to the property sale have been settled. The application process involves submitting Form T2062, which requires information about the property and the expected capital gains. If the CRA issues the clearance certificate before the sale, the purchaser is not required to withhold any amount, allowing the vendor to receive the full proceeds from the sale.

5. Consequences of Non-Compliance

Failure to comply with these regulations can lead to significant penalties. If the prescribed holdback is not properly executed, the purchaser may become liable for the unwithheld tax, which could be substantial depending on the capital gains. Additionally, the non-resident vendor may face complications when attempting to repatriate sale proceeds, particularly if tax liabilities are unresolved.

6. Impact on Marketability and Timing

Understanding these implications can also affect marketability. Potential buyers may be deterred by the holdback requirements, especially if they are unaware of the process. Therefore, it’s critical for non-resident sellers to work closely with real estate professionals and legal advisors who can guide them through the complexities of the sale and ensure compliance with tax obligations.

Conclusion

Selling residential property in Canada as a non-resident presents various challenges, particularly regarding tax implications and prescribed holdbacks. By understanding the requirements set forth in the Income Tax Act and seeking appropriate legal advice, non-resident vendors can facilitate a smoother transaction while minimizing potential liabilities. Engaging legal counsel experienced in Canadian real estate transactions is highly advisable for non-residents. Legal experts can help.

At SB LLP, we specialize in real estate law and can assist clients with navigating the regulatory landscape, coordinating the clearance certificate application, and advising on the most efficient methods to structure the sale. Feel free to contact one of our real estate lawyers should you require further information or assistance on your real estate needs.

*Disclaimer: This article provides legal information and is not intended nor to be construed to provide legal advice.