Non-resident Selling Canadian Real Estate
In my last article, I wrote about the Canadian tax laws and issues that a non-resident of Canada needs to consider when receiving rental income from Canadian real estate. In this article, I will focus on the tax filings and issues that need to be considered when a non-resident sells their rental property.
Canada has the right under its tax laws and under most tax treaties with other countries to tax the sale of Canadian real estate sold by non-residents. To make sure that they get their tax there is a process that the seller must go through with the Canada Revenue Agency (CRA).
The first step is that the purchaser is required to withhold 25% of the total purchase price from the seller. In most cases, the seller’s lawyer will keep the funds in their trust account.
The seller must let the CRA know about the sale or proposed sale by filing for a Certificate of Compliance, form T2062. This form is due no later than 10 days after the actual sale. The penalty for late filing is $25 per day (minimum penalty $100) to a maximum of $2,500, even if no taxes are owing. If the property is jointly held, then multiple penalties will apply. Since it takes time for the CRA to process, it is better to file sooner rather than later to speed up the release of the funds withheld. There are a number of attachments that must accompany the T2062. The most common ones are:
- The offer to purchase (proposed disposition)
- The sales agreement (actual disposition)
- The purchase agreement when the property was acquired
- Documents to support additions to the cost base after purchase (e.g. new room addition)
On the form, you indicate the sale price and the cost base and calculate the capital gain. The form then tells you to calculate the expected payment to the CRA, which is 25% of the capital gain.
For a rental property, you also need to file form T2062A. If you have claimed capital cost allowance (CCA) (tax depreciation) on the building during your time of ownership there may be additional taxes to pay. In most cases, if there is a capital gain on the property the CRA will “recapture” those CCA claims. The tax to be submitted is not a fixed rate of 25% but rather must be estimated based on Part 1 of the Income Tax Act. I recommend that you use a tax professional to calculate the tax estimate. If there has been a decline in the value of the building since you purchased the property you will have to provide proof to the CRA to avoid paying tax on some or all of the possible recapture. Included with this form you need to provide the CCA schedules that were filed with your tax returns during the time of ownership.
After you have filed the T2062 and T2062A together the CRA will contact you and advise that the forms and tax calculations are acceptable or if they require adjustments or more support. The CRA will then request payment or acceptable security for the tax. The seller’s lawyer will then remit the tax to the CRA and then the CRA will issue a Certificate of Compliance. The seller’s lawyer can then release the remainder of the funds.
After the year-end, the seller is required to file two income tax returns. In most cases, they are motivated to file these returns, as typically the withholding taxes discussed above are more that the final tax liability. The first return includes your rental activities for the period of ownership (see my last article). On this return you report the recapture of depreciation and claim the withholding taxes paid as calculated on the T2062A. You should include with your return, a copy of the compliance certificate.
On the second tax return, you report only the capital gain. You will also be able to claim disposal costs such as legal fees and real estate commissions to reduce the capital gain. You claim the withholding taxes paid as calculated on the T2062. Again, you should include with your return a copy of the compliance certificate.
As you can see, it is a complicated process for a non-resident selling real estate, please contact me for assistance.