Are you a non-resident of Canada planning to sell Canadian real estate like a former home, a cottage or an investment property?
This article provides cost saving advice for non-residents selling Canadian real estate. It also outlines the Canadian tax obligations for non-residents of Canada planning to sell Canadian real estate.
- You can take steps to reduce your Canadian taxes and improve cash flow.
- Unless you take action in advance, at least 25% of the sales price will be withheld on closing for income tax.
- You need to file an income tax return in Canada to report the sale of your Canadian property.
- You may need to file an Underused Housing Tax return as well. Do don’t forget to read our article Underused Housing Tax (UHT) as it may apply to you.
- Stern Cohen tax specialists can assist you with this process for maximum cost savings.
Reducing Non-resident Withholding Tax on the Sale
Non-residents are often surprised to discover the amount of tax withheld on the sale of their Canadian real estate. Many expect to pay tax on a capital gain – but they don’t expect 25% or more of the sales price to be withheld. Fortunately, you can reduce this withholding tax to improve your cash flow. We have outlined below the two ways withholding tax can be calculated and how Stern Cohen LLP can help you reduce the tax.
1. Default Method – Calculated based on sales price
25% of the sale price of non-depreciable property (e.g. land) and 50% of depreciable property (e.g. a rental building) is required to be withheld on the sale of Canadian real estate owned by a non-resident of Canada. In practice, you may find 25% is commonly withheld on the total sales price of residential real estate.
2. Optional Method – Calculated based on gain on property
A request for a Certificate of Compliance (aka a Clearance Certificate) under Section 116 of the Income Tax Act can be prepared to reduce the required withholding tax to 25% of the capital gain. Where tax depreciation (called capital cost allowance) was previously taken, an additional amount of tax will be required to be withheld.
How to Reduce Your Withholding Tax
If you would like to reduce your withholding tax, a request for a Certificate of Compliance needs to be submitted before the 10th day following the closing of the property. It is possible to make the request before closing and so we recommend making the request as soon as the sale is firm. Until the request is approved by the Canada Revenue Agency (CRA), the lawyer will continue to withhold tax based on the default method described above. The CRA may take up to 10 weeks to process the request.
To make the request, you will need to provide support for the original purchase price, capital additions, title to the property, and sales agreements. If you have ever rented the property, additional information will be required. If you rented the property and didn’t previously disclose the revenue you will need to report this before requesting a certificate.
The time and cost to prepare a request is frequently affected by the amount of time spent gathering support for the adjusted cost base (ACB) of the property. The ACB is the original purchase price plus capital additions. The CRA will want to see supporting documents for all additions.
Avoiding Penalties & Becoming Compliant
If you rented the property while you were a non-resident and did not remit non-resident withholding tax on the rental revenue each month and/or have not filed an income tax return, Stern Cohen’s tax specialists can help you become compliant. You may be eligible to come forward voluntarily to avoid penalties by the CRA.
You must become compliant before you make a request for a Certificate of Compliance.
You Must File a Canadian Income Tax Return
Finally, you are required to file a Canadian income tax return to report the sale of the Canadian real estate. In many cases, the tax calculated on the income tax return will be less than the amount that was required to be withheld on the sale of the property. As a result, you’ll get a refund!
How Stern Cohen’s Tax Specialists Can Help
- We can help you determine the most beneficial course of action based on your unique situation.
- We can request a Certificate of Compliance (also known as a Clearance Certificate) under Section 116 to reduce the withholding tax required on the sale.
- We can file your Canadian income tax return to report the sale and potentially recover additional taxes previously paid to the Canadian government.
- We can also prepare catch up filings if you rented the property and didn’t report the income. This includes help applying for a voluntary disclosure.
Disclaimer: While the information in this article is meant to be helpful, it is not meant to be advice for your unique situation. Please contact us If you would like assistance with your tax needs.