Non-Resident Tax Implications

The question of what a non-resident purchaser of real property in Canada needs to know about tax implications continues to be popular as visitors to Victoria decide to buy a place and spend more time here. Here is an update of a previous article.

Other than the usual tax considerations affecting all owners of real property, there are two areas of particular concern to non-resident purchasers.

There is no requirement in British Columbia that the purchaser of real property have any particular residency or citizenship. To occupy residential premises, the non-resident must comply with immigration requirements. These vary depending upon the nationality of the individual involved. U.S. citizens are relatively free to occupy residential premises in Canada on a temporary basis.

If the non-resident property owner wishes to rent out the property the first tax situation will be encountered. Under the Income Tax Act s. 215 a person paying rent to a non-resident is required to withhold 25% of the gross rent paid and remit it to the Receiver General for Canada . Section 216(4) provides an alternative to this holdback. It is possible for the non-resident to elect to file Canadian income tax returns. A property manager can then become responsible for filing the Canadian income tax returns and is exempt from the withholding requirement mentioned above. The property manager can withhold and remit 25% of the net income derived from the property in question.

The main difficulty to a non-resident owner of real property in Canada occurs when they go to dispose of the property. This situation is not limited to selling the property. When a person dies, they are deemed to dispose of it at fair market value. As well, the transfer from a person to his or her company or relative is also a disposition despite the fact that there may be no money paid. Section 116 of the Income Tax Act requires the purchaser of real property from a non-resident vendor to withhold a portion of the purchase price and to remit it to Revenue Canada within 30 days of the end of the month in which the purchase and sale took place.

The amount to be withheld is one third of the gross purchase price for non-depreciable property and half of the gross purchase price in the case of depre­ciable property. Generally speaking, residential property is dealt with on the basis of withholding one third of the gross purchase price. The purchaser need not remit this money to Revenue Canada if the vendor can present them with a clearance certificate. Usually, the clearance certificate is not received until after the closing of the sale. For this reason, arrangements are made between the lawyers for the vendor and the purchaser to withhold the appropriate amount of the purchase price until the clearance certificate is obtained. This can easily take several weeks.

The non-resident can apply before the sale to Canada Customs & Revenue Agency (CCRA) stating the name and address of the purchaser, the description of the property, the estimated or the actual sale proceeds and the adjusted cost base of the property of the non-resident. CCRA will issue the clearance certificate only after all Canadian taxes of that non-resident have been paid. This would include any taxes on rental revenue. If the application is made on the basis of an estimated sale price, then the clearance certificate will set a certificate limit. In order to obtain the certificate, however, tax at the appropriate rate (one third or half) must be paid on the capital gain without deduction for sale costs. If the vendor does not have the money for the tax until the sale proceeds are received then arrangements must be made with CCRA to secure that payment. Usually the under­taking of the vendor's lawyer to pay the amount upon receipt of sale proceeds is sufficient.

Once the property is sold and the clearance certificate obtained, the vendor may file a Canadian income tax return claiming the cost of sale. CCRA will process this tax return and eventually issue a refund of the tax paid on closing costs. This takes approximately ten months.

While it is not a problem for people who are non­-resident of Canada to acquire property here, the effect of the tax withholding provisions can cause hardship if they are not aware of them. It is important that non-resident owners receiving rental revenue be aware of the election under Section 216 of the Income Tax Act permitting taxation of 25% of the income rather than the gross revenue derived from the property. If the section 216 return is not filed within two years from the end of the year in which the rental income was paid or credited to them it is too late with respect to that period of time. It is also important that non-resident owners be aware of the withholding provisions that occur on disposition. They can be grossly inconvenienced in the event that they are relying on sale proceeds to purchase another property and have not made advance arrangements with CCRA for a Clearance Certificate. Worse still, the vendor may have a mortgage to discharge with a balance of over 66% of the sale price. Here, a clearance certificate or alternate financing are essential to completing the sale.

Non-Resident Tax Obligations

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