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Updated on September 30, 2024
Several questions arise in the case of non-residents who sell real estate in Canada.
In the last few years, we have witnessed a significant increase in real estate transactions and, more specifically, transactions involving the sale of properties by non-residents of Canada.
This type of transaction is governed by specific tax rules and this article aims to demystify the role of the various stakeholders in terms of tax compliance.
Non-resident sellers’ responsibilities
Non-residents who dispose of real property located in Canada must notify the tax authorities of the disposition. This notification will enable them to obtain certificates of compliance attesting that everything is in order from a tax perspective.
The notification forms T2062 (federal) and TP 1097 (Québec) are used to determine the capital gain on the sale of the property and the corresponding tax instalment to be paid to the tax authorities to obtain the certificates of compliance. The tax instalment is generally 25% of the capital gain at the federal level and 12.875% of the gain in Québec for a property located in Québec. Given the increase in the capital gains inclusion rate, the applicable federal withholding rate would rise from 25% to 35% for dispositions on or after January 1, 2025. The Québec government has yet to comment on the increase in withholding for Québec tax purposes.
Note, however, that the tax instalment to be paid will be higher in the case of a rental property for which capital cost allowance has been claimed in the past and the non-resident seller will also have to file federal Form T2062A.
Non-resident sellers may send this notice before the planned date of sale based on an intent to purchase (future disposition) and no later than 10 days after the signing of the deed of sale (actual disposition).
Non-resident sellers who do not meet this legal requirement may be subject to a penalty of up to $5,000 ($2,500 at the federal level and $2,500 in Québec).
Important to note: before issuing the certificate of compliance, tax authorities ensure that the seller has fulfilled all tax obligations during the period of ownership of the property. This includes paying tax on rental property, filing returns and paying the federal tax on underused housing for non-resident owners and Canadian non-citizens.
What’s more, non-resident sellers are required to file an income tax return by April 30 of the year following the year in which the sale took place to report the capital gain and calculate the actual tax on the capital gain according to the progressive tax table for individuals. If the actual tax is less than the installment paid at the time of the transaction, they can claim a refund for the difference.
Buyers’ responsibilities
The buyer guarantees payment of the capital gains tax instalment. If the seller does not obtain the certificates of compliance prior to the sale, the buyer will be responsible for withholding, at the time of signing the contract of sale, an amount corresponding to 37.875% (an increase in the rate is planned from January1, 2025) of the sale price, which he will have to pay to the tax authorities, on behalf of the non-resident seller, within 30 days of the end of the month in which he acquires the property. If he fails to do so, he will be personally liable to pay the tax arising from the transaction.
Central role of the notary and tax advisor
The notary who represents the buyer in the transaction and the tax specialist who is mandated by the seller play a central role in this process.
It is the notary’s professional responsibility to ensure that buyers fulfill their withholding tax obligations and to advise sellers of their responsibility to file applications for certificates of compliance.
The tax advisor explains the importance for the non-resident seller of filing applications for certificates of compliance, which will reduce withholding tax on the proceeds of sale and avoid significant penalties for failure to file the prescribed forms. The tax specialist also assists the non-resident seller in preparing the applications and calculating the capital gain and taxes to be paid.
In conclusion, in real estate sales transactions involving non-resident sellers, the notary works with the sellers’ tax advisor to ensure compliance with the specific tax requirements for this type of transaction.
Our team of international tax experts offers personalized assistance based on the specifics of each transaction. Contact us to speak with one of our specialists.