Understanding a sale of a taxable Canadian Property by a non-resident

This article has been written to give an overview of what happens when a non-resident sells Canada property (land/real property, immovables, or timber rights.) It has been written in plain language and does not give detailed steps as to what happens. Readers are advised that, if they find themselves in this situation, to obtain competent legal and tax support for their transaction.

For this article, references to the Act refer to the Canadian Income Tax Act. While the article is written in specific reference to a transaction occurring in every province but Quebec, Quebec laws mirror the steps imposed by Canadian law and the process is similar.

I have handled transactions of this nature for multiple non-resident clients selling properties in the provinces of Ontario, Quebec and British Columbia.

Background

When a non-resident sells a Taxable Canadian Property, there is an imposition of Canadian tax law on the transaction. This is because of the risks that the non-resident may not file and pay taxes on the transaction. Accordingly, the Act imposes an immediate liability on the transaction at the time of the sale. Equally and unusually, the liability has been transferred to the purchaser in the transaction, unless the tax department obtains a down payment of the tax from the purchaser and then issues a Certificate to the vendor, to be given to the purchaser, to release the purchaser from their obligations.

Who is responsible for the taxes for this transaction?

The Act imposes the liability for this transaction to the purchaser. This means that, if the purchaser does not pay attention to this liability, they will be required to pay 25% of the purchase price at a later date to the Canada Revenue Agency.

Example:

If you purchase a property for $200,000 CDN from a non-resident and do not take steps to address the tax liability, at some later time the Canada Revenue Agency will want another $50,000 from you (the purchaser) for that property.

Part I, Division D, Income Tax Act

To protect the purchasers, a standard question that is asked by all real estate agents to their clients before the property is put up for sale is if the vendor is a resident of Canada. In a private sale, it is incumbent on the purchaser to determine the vendor’s residency before closing. There are complications though, as a vendor may be resident at the time the property was put up for sale, but later become non-resident prior to the sale. Equally, there are situations where the sale of the property causes the vendor to lose their Canadian residency, as that was the last tie to Canada. Purchasers and their agents should be aware of these situations.

What are the events that occur during the sale by a non-resident?

During a sale of a property by a non-resident, the following events occur during a sale by a non-resident but do not occur during the sale by a resident. (Because this article is only concerned with a sale by a non-resident, we will not discuss the events that occur during the sale by a resident.) The four events are:

  1. The Application,
  2. The Hold Back,
  3. The Surety and Issuance of the Certificate, and
  4. The Non-Resident Tax Filing.

The Application

The Application for the Certificate must be made at any time between the Conditional Offer to nine days following closing. In general, I recommend to my clients that the Application be submitted to the CRA within a few days following the removal of all Conditions to the Offer to Purchase.

Should the Application be late, a penalty will be imposed. As the penalty is significant, it is highly recommended that the Application be timely filed.

The Application will include support for the purchase, all Canadian tax filings respecting the Property during the period where it was held by the Non-Resident, and the Offer to Purchase. Should the Application not include the support, the CRA may request the support prior to specifying the Surety, thereby delaying the issuance of the Certificate.

The CRA is unfortunately slow in processing applications, with most (or all) Certificates being issued after Closing. Therefore the Legal Parties (Lawyers, Legal Assistants, Notaries) will be required to impose a Hold Back on the transaction at closing.

The Hold Back

Should the Certificate not be issued by Closing, the Legal Parties will require a portion of the purchase price (generally 25%) to be held back (referred to as The Hold Back in this article) to protect the buyer from a later demand from the CRA for payment.

It is in the best interest of the Vendor to demand that this Hold Back be placed in a Trust Fund that pays interest. While some provinces’ Law Societies do not permit the pooled trust funds to pay interest to the client, there is generally the option for a separate trust fund which will pay interest to the client. As the interest is material in these instances, I will advise my clients to take steps to obtain the interest.

The Hold Back continues until the CRA issues its demand for a specified Surety. The Surety will be either the same as the Hold Back or a lessor amount.

While the Hold Back can be in the Trust Fund of the Legal Counsel for the Vendor, it is generally held by the Purchaser’s Legal Counsel. However, it should be noted that the monies are owing to the Vendor, pending notification by the CRA of its Surety.

The Surety and Issuance of the Certificate

The CRA will review the Application and issue its specification for the amount of the Surety that it will require. The review, in recent years, has been performed by two parties at the CRA. The first party is generally at a clerical level, while the second party is generally a Designated Accountant who is very familiar with the law.

The CRA will specify the address that the payment of the Surety is to be made and this specification should be followed to the letter as any delay could easily delay the issuance of the Certificate significantly. On receipt of the Surety, the CRA will issue the Certificate (and its copies) by regular post.

On receipt of the Certificates, the Legal Parties generally agree to the release of all remaining funds in the Hold Back to the vendor.

The Vendor may elect to continue the process or stop. In general, as certain costs may not be declared in the Application, it is in the best interest of the Vendor to continue to the next step.

However, at this point, all liabilities on the part of the Purchaser have been covered.

The Non-Resident Tax Filing

The non-resident vendor may elect to file a Canadian Tax Return at this point and it is in the best interest of the vendor to do so, as there are additional expenses that may be declared as part of the tax return that could not be declared as part of the Application.

It is for this reason that the person handling these steps should be a tax professional rather than legal counsel.

The vendor will be required to attach the appropriate original Certificate copy to the tax return being filed. This is so that the vendor may obtain credit for the taxes remitted as Surety.

Who should do the work

While there are some lawyers who are trained in this work, they are few and their rates are high.

I recommend that you (the non-resident vendor) get a tax professional to handle the above steps for the tax side of the transaction, while leaving the legal work to your Legal Counsel.

Generally, your tax professional will have been filing your Canadian tax returns for the years that you held the property and would have most, if not all required information to complete the work.

Wait… I was supposed to file Canadian tax returns while I held the property?!?

Yes, you are required to file Canadian tax returns while you hold the Canadian property and you earn money from the property. If you have failed to do so, you may wish to investigate filing for a Voluntary Disclosure, which is a separate topic. However, I would recommend that you complete the Voluntary Disclosure step prior to putting the property on the market. Otherwise, you have a significant problem with very little time to resolve.

On the other hand, if your property was a vacation home that you never used other than for personal or family member’s holidays, non-filing of tax returns would unlikely to be an issue.

If you are not certain, please contact me using the Contact Me box on left side of the page.

Can I engage Tim Parris to handle my sale?

Yes. I will handle the tax work, including the four steps listed above, while your Legal Counsel handles the sale. Please contact me using the Contact Me box on left side of the page.

Note that while this article was current at the time of writing, the law may change, and this article may later become out of date as a result. Equally, circumstance may change the rules. As a consequence, Readers are cautioned to seek proper tax advice before undertaking such a transaction.

Past Estate Planning now creating issues

A previous common practice of putting children on family properties is now causing conflicts with current laws.

Situation

What has happened in the past is that children would be put on the title for the family properties for the purpose of moving the properties to the children seamlessly for estate purposes. The thought was that the children then could take over the family property, generally a family cottage, with little hassle when the parents are no longer able to manage the property.

Conflict with tax law

Doing so creates issues with tax law. This maneuver is an attempt to circumvent the deemed disposition of the property on death. While the parents can “gift” the property to the children, the property is deemed to have been sold at fair market value at the time this occurred. If this did not happen (and the tax department actually keeps these details on file,) then the capital gains can be significant.

Another problem is if the property is sold after the addition of the child, but before the child receives the full ownership of the property. For example, if the child was put on the title when they became of legal age, then the property is sold decades later, the child isn’t aware that they have to declare that sale on their tax return. This has been required in Canada for the past few years and there are several people who have discovered that they didn’t declare the sale when they should have. Or the child wasn’t called into the meeting to handle the sale of the property to the new owners, rending the actual sale at risk!

Property ownership issues

It is equally possible that the parents may have financial difficulties while the child has been put on to the property title. As a result, the municipality and/or mortgage company may seek redress from the child for outstanding debts that the parents were unable to pay. This is a concern that all individuals who are on title should be aware of as it does impact their personal credit risk. Lenders are increasingly wary when people have their name on multiple titles.

Conflict with estate law

Another issue that has come up is the conflict with estate law, specifically probate. While this isn’t an issue in some jurisdictions, others have indicated that they consider the placement of children on title for the purpose of transferring the property outside of probate is possible fraud. I am not presently aware of any court cases which have settled this situation, but it is another risk that people should be aware of.

This article touches on some legal matters which is better addressed with your legal adviser to provide specific and personal advice for your personal situation. It is only an introduction to the matter and is not intended to replace legal advice from a lawyer or other member of the legal profession.

What do people want…

Last month, I had a couple referred to me by a financial support services company. The company provides financial services to employees of their client, but have realized that their knowledge is in financial services, not taxes, so refer tax issues to me.

The couple had been reassessed for the prior year (that is, 2017) by the CRA for missing income and asked support services if this was normal. Support services took one look at the returns and referred the couple to me. Which was good for the couple.

Not only was the prior year reassessed, but the previous year was also reassessed, AND the current return (2018) was heading into the same problem.

I spent 2.5 hours with the couple, going over the returns in person, explaining what was happening and what I was seeing and what fixes that I could see. (While I could detail the problems here, the end result was that the returns were wrong.)

A few days later, we had a chat by phone, and they will be coming in to sign the corrections later this week. Yes, they owe a large amount, but the fixes that I have put into place finish the problems. Both 2017 and 2018 was fixed, and the final bill would be slightly less than the bill for 2017 as prepared by the CRA. We agreed not to touch the 2016 as the changes didn’t warrant touching.

As I explained to them, if you had owed the amount at the beginning when you filed, you would have been happy. The only reason that you are unhappy is because you found out the problem two years later. And, while everyone likes a refund, what they really want is no problems.

A correct tax return, even if you owe, is better than one that causes grief.

Why you should not email documents…

I have had several people prefer to use email to send me documents. This has created issues for most of them. Here are some issues for you to be aware of:

  • Everything that you send by email can be read by everyone in its path. And email does not travel in a straight line – People are surprised to realize that most emails being sent from Ottawa, ON to Ottawa, ON usually travel either through Michigan or New York State.
  • Email may be mis-directed or mis-typed. I had one people call wondering where their tax return was at. Turns out that they emailed their papers to someone in South Africa.
  • Replying to a previous email can route the reply through a filtering system which strips out attachments. Your documents are not received.
  • Replying to a previous email, then adding additional versions of my email address results in both emails being identified as spam and the email by-passes my in-box.
  • Replying to a previous email can result in the email being identified as non-urgent or from a conversation which has now expired. The email by-passes my in-box.
  • Sending emails about taxes may result in the email being identified as spam and by-passing my in-box.
  • Emails can expire. This means that your email isn’t seen.
  • I am a bulk receiver for emails. This means, no matter what I do, it is entirely possible that your email will not be on my screen by the time I look at the emails.

I have tools which ensure that your documents are received and logged as received. All clients can use them. Those tools prevent all of the above problems.