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.