By Nathan Hwee, Chinneck Law
There are specific legal and accounting matters that must be considered when a non-resident of Canada sells Canadian real estate.
Whenever a non-resident of Canada sells Canadian property, the non-resident seller must pay tax on any gain realized on the sale to the Canadian Revenue Agency (“CRA”). To comfort the purchaser that the proper amount of tax will be paid to the CRA, the seller must provide to the purchaser, on or before the closing date, a Clearance Certificate from the CRA. The Clearance Certificate is issued by the CRA pursuant to section 116 of the Income Tax Act and certifies the amount of tax the seller must pay on their sale. If the seller has the Clearance Certificate on or before the closing date, the tax owed will be deducted from the sale proceeds and paid directly to the CRA by the seller’s lawyer.
If the non-resident seller does not have the Clearance Certificate on the closing date, the buyer must holdback a certain percentage of the sale proceeds until the seller obtains the Clearance Certificate. For non-depreciable property (Ex. Property occupied by the seller or family member(s) of the seller for personal use), 25% of the sale price must be retained. For depreciable property (Ex. Income-generating property), 50% of the sale price must be retained. The transaction will close with the holdback funds held in a lawyer’s trust account until the seller obtains the Clearance Certificate. Once obtained, the proper amount of tax will be paid from the holdback funds and the seller will receive any amount that is remaining.
The non-resident seller who does not have the Clearance Certificate on the closing date should be aware of the following:
• The seller must apply for the Clearance Certificate within 10 days of the closing date.
• The seller should retain an accountant in their application for the Clearance Certificate.
• The seller should allow 12 to 14 weeks to obtain the Clearance Certificate (or longer).
• The amount of the holdback is based on the sale price, not the equity in the property. The seller may have to provide additional funds to close their sale if there is an encumbrance against title of the property that must be discharged and paid in full on closing (Ex. A mortgage or lien), and the equity in the sale is not enough to discharge the encumbrance and provide the requisite holdback amount.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer. For specific technical or legal advice on the information provided and related topics, please contact Chinneck Law.