So the time has come for you, a non-resident of Canada, after
many years of personal enjoyment or rental revenues, to sell your
Canadian real estate. Unfortunately, this requires one last trip
down the rabbit hole of the Canadian tax system.
The process of reporting the sale of your property can be broken
into three steps.
Step 1 requires the filing of an application for a clearance
certificate (T2062, Request by a Non-Resident of Canada for a
Certificate of Compliance Related to the Disposition of Taxable
Canadian Property) within 10 days of the sale closing. In
practice, the T2062 can be filed prior to the closing date
once a signed agreement is in place. The clearance certificate
confirms to the parties involved in the sale that sufficient
withholding taxes have been remitted to the Canada Revenue Agency
(CRA) and any remaining sale proceeds are eligible to be
transferred out of the country. Under Canadian tax legislation,
until a clearance certificate is received the purchaser can be
liable for Canadian taxes equal to 25 per cent of the purchase
price. In order to cover this potential liability, the lawyers in
the transaction often hold in trust 25 per cent of the sale
proceeds until the clearance certificate is issued. Proceeds in
excess of the 25 per cent for withholding taxes, closing costs
(e.g. realtor commissions, professional fees, sale price
adjustments), and mortgage repayment, if any, are released upon
Step 2 of the process involves the payment of the tax liability
as estimated on the clearance certificate. The tax liability will
equal 25 per cent of the estimated gain on the property sale as
reported to the CRA on the clearance certificate. If the property
has been rented and a capital cost allowance deduction has been
claimed on the building, the CRA will assess an additional tax
liability of 50 per cent on this portion of the gain. The estimated
tax liability is then paid to the CRA from the sale proceeds held
in trust by the purchaser's lawyer. At this point, any balance
remaining in the lawyer's trust account is then released upon
receipt of the clearance certificate. In the event that rental
income has been earned from the property and has not been reported
annually to the CRA under Section 216 of the Canadian Income
Tax Act (ITA), the clearance certificate will be
withheld until all Section 216 returns have been assessed and
filed. This can delay the entire process for over a year in some
Step 3 involves filing a Canadian tax return under Section 116
of the ITA to recover a portion of the tax liability
remitted to the CRA in Step 2. As the effective Canadian tax rate
on capital gains will rarely exceed 25 per cent, the withholding
taxes remitted in Step 2 often qualify for a partial refund. This
tax return is due April 30 of the year following the year in which
the sale occurred.
Depending on the time taken to process the application, receipt
of the clearance certificate, and, therefore, a substantial portion
of sale proceeds, can take as long as four to six months.
Processing the final Section 116 tax return can also take as long
as six months. It is important to be aware of these timelines in
contemplating subsequent investment of sale proceeds.
GST and HST might also apply to non-resident property sales,
particularly where commercial or short-term residential rental
income was earned from the property.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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