The Income Tax Consequences for Selling Real Estate in Canada as a Non-Resident
Under section 116 of the Canadian Income Tax Act, non-resident vendors disposing of certain taxable Canadian property (partially listed below) are to notify the Canada Revenue Agency (CRA) about the disposition either before they dispose of the property or within ten days after the disposition. Consequent to this, the vendor has to pay the CRA either an amount to cover the tax on any gain the vendor has made, or appropriate security for the tax. Thereafter, the CRA will issue a certificate of compliance to the vendor, a copy of which is also sent to the purchaser. If the purchaser does not receive such a certificate, he is to remit a specified amount to the Receiver General for Canada and is entitled to deduct the amount from the purchase price. All such payments from the vendor and/or purchaser will be credited to the vendor’s account, to be taken under consideration when the vendor’s income tax return for the year is assessed.
Taxable Canadian property (referred to above) means, (a) real property in Canada (ie. real estate); (b) property used in respect of a business carried on in Canada; (c) designated insurance property of an insurer; (d) shares of a corporation resident in Canada, not listed on a prescribed stock exchange; (e) shares of a non-resident corporation not listed on a prescribed stock exchange for the past five years; (f) a capital interest in a Canadian resident trust (other than a unit trust); (g) a unit of a Canadian resident unit trust (other than a mutual fund trust); (h) a unit of a mutual fund trust if, at any time during the last five years 25% or more of the units of the trust belonged to the taxpayer and/or persons with whom the taxpayer did not deal at arm’s length; and the like. Certain types of taxable Canadian property are regarded as excluded property according to subsection 116(6) and, hence, are not subject to the requirements of section 116.
Subsection 116(1) stipulates that the vendor submits a notice to the CRA for a planned sale of his/her property. This notice should be sent at least 30 days before the property is actually sold/closed to permit sufficient time to review the proposed transaction and verify that the vendor’s payment or security is adequate. It is likely that the CRA will issue a T2064, Certificate – Proposed Disposition of Property by a Non-Resident of Canada – before the actual date the vendor disposes of the property. Where notification of a proposed sale was not made or if the transaction was completed in a manner different from the proposed sale, the vendor must send the CRA a notice of the actual disposition, as required by subsection 116(3), by registered mail, not later than 10 days after the date the property was disposed of. It is absolutely essential for the vendor to use the appropriate authorized form to notify the CRA about a section 116 disposition/sale. Instructions are given in the forms as to how to report the transaction, calculate the gain or loss, income recapture or terminal loss (ie. for depreciated assets), and make the required payment on account of the tax payable. All relevant information and documentation as outlined in the “Supporting Document List” attached to the authorized form should be submitted by the vendor. These things are needed for issuing the certificate in time. The notification form should be signed by the vendor or by the vendor’s representative (ie. Lawyer); provided a letter authorizing the CRA to deal with the representative is given. Forms can be obtained from any tax services office (TSO) or downloaded from the net (www.cra.gc.ca).
Subsection 248(1) explains a disposition as “any transaction or event entitling a taxpayer to proceeds of disposition/sale of the property”. Properties are generally considered “disposed of” at the time the deed, in properly executed form, is delivered to the purchaser on the closing date. If, however, it is in the form of an agreement for sale, then the disposition normally occurs when the properly executed agreement for sale is delivered to the person acquiring the property.
In contrast with the above, there is no treaty exempt status in section 116. Nevertheless, CRA permits exemptions under a specific tax treaty at the time the notice for disposition was filed. The vendor needs to mention the applicable Article (paragraph) of the particular treaty that Canada has with his/her country of residence (such as the U.S.A.), and submit the necessary documentation to support the claim. The particular tax treaty under which the exemption is claimed should be specified in the submission, and it should include items such as proof of residency, or proof that the gain has been or will be reported in the vendor’s country of residence (such as the U.S.A.).
Inventory of land was not a requirement under section 116 prior to February 20, 1990. After that date, the CRA introduced a discretionary exemption policy for certain vendors who operate a business involving inventory of land. To get this exemption, the vendor should satisfy the CRA that: (a) property transactions of this kind have been previously reported in the income account/earned for tax purposes; and/or (b) the vendor is making regular instalment payments on account of tax payable on income. This is when the vendor is a business that trades real estate land as its source of income.
The CRA issues the certificate of compliance once the documents for scrutiny are filed and taxes paid, shortly after verification and validation thereof. The certificate is important to both the purchaser and the vendor for tax purposes later on.
The vendor’s failure to comply with the requirements of subsection 116(3), and the non-availability of a certificate from CRA would make the purchaser liable under subsection 116(5) to pay a specified amount of tax on behalf of the vendor. If so, the purchaser is then entitled to deduct that amount from the purchase price. Should the purchaser fail to provide such payment because he/she may have overlooked it, when the time comes for the purchaser to re-sell the property, he/she will have to obtain the certificate that it should have obtained from the original non-resident vendor. Thus, the purchaser will be liable to make the tax payments and chase the original vendor some time later.
If there is a deemed disposition on death of the non-resident vendor under subsection 70(5), section 116 will not be applicable. In that event, the executor acting on behalf of a non-resident decedent should file an income tax return for the year of death and pay any tax that might be necessary on the deemed disposition, without actually selling the property just yet.
Non-residents in Canada holding real estate property or other types of property such as private corporations, should definitely contact the lawyers at Levy Zavet PC to assist in getting the proper tax clearance certificates. This will ensure that your deals are not jeopardized, and that you are not paying too much tax or penalized. Furthermore, purchasers buying real estate property from non-residents should contact the lawyers at Levy Zavet PC to assist in your closing, while making sure that you are not liable for the taxes owed by the non-resident vendor.