Hourly Based Fee
Only Advice
Call today to arrange a meeting.
1 (902) 393-1248
P.O. Box 1201     Charlottetown, PE     C1A 7M8
T: (902) 393-1248 (direct)     CorkumFinancial@pei.sympatico.ca     www.CorkumFinancial.ca

Transfers of Canadian Real Estate Involving Non-Residents

There are at least three common situations that individuals should be aware of if they are involved in cross-border transactions. The most common is receipt by a non-resident of income such as interest, dividends, rents and royalties from a Canadian source. A second situation is employment of a foreign resident by a Canadian company. The other situation relates to sales of property. The topic of this article is sale of property that is real estate (not depreciated or used in a business).  This is an overview; for more details, refer to CRA Information Circular IC-72-17R5 and Interpretation Bulletin IT-173R2.

Section 116 of the Canadian Income Tax Act requires a purchaser to withhold income taxes when real estate is disposed of by non-resident of Canada. The same filing requirements apply whether property is sold or gifted or transferred pursuant to a Will, and whether or not there is a taxable gain. The procedure for this tax withholding is explained below. Keep in mind that we are discussing only non-depreciable real estate not used in a business; that is, it is property held by an individual for personal use.

The non-resident person disposing of the property must send a notice to the Canada Revenue Agency (CRA) using Form T2062. This form is available from the Canada Revenue Agency, or they may write a letter to CRA providing the same details. The non-resident must pay a specified amount, which is currently 25% of the gain on the sale. Alternatively, security satisfactory to CRA may be pledged to ensure payment is made at a later date. After these requirements are met, CRA will issue a “certificate of compliance” to protect the purchaser from a potential tax liability.

If the non-resident vendor fails to comply with this requirement or if the proceeds set out in the certificate are less than the actual proceeds, the purchaser will be held liable on behalf of the non-resident.  For that reason, the purchaser may withhold and remit 25% of the purchase price.  Why is the purchaser held liable when the tax is owed by the vendor? Logically, it will be easier for the CRA to find and get payment from the purchaser than a vendor located in another country.

There are two alternatives for filing Form T2062. The form may be filed at least 30 days prior to the transaction with estimated proceeds being reported. In this case, the Canada Revenue Agency will issue a certificate of compliance prior to the actual transaction date for the proposed transaction. In this way, the title transfer can occur without the purchaser having concerns about tax liability. Alternatively, Form T2062 may be filed within ten days after the sale. In such a case, the purchaser can be held liable for taxes of the vendor until the a certificate of compliance is received. For this reason, the purchaser may wish to hold back a portion of the purchase price pending receipt of the certificate.  Often, the full payment is made and the law firm holds 25% of the proceeds in trust until the certificate is obtained.

Prior to filing the Form, individuals without a social insurance number should contact the Canada Revenue Agency to obtain a “tax identification number”. See Form T1261.  In addition, appropriate documentation should be obtained related to the selling price (or fair market value where a gift is occurring) and the original cost of the property. The instructions to Form T062 indicate the documents required. The Form can then be filed with the appropriate remittance, and the transaction can be completed.

A vendor is not required to file a Canadian tax return in respect of the disposition if all of the following apply:

  1. the vendor is a non-resident at the time of the disposition;
  2. the vendor has no tax payable for the year pursuant to Part I of the Canadian Income Tax Act;
  3. the vendor does not owe any amounts under the Act for any prior year (other than amounts for which the CRA has accepted and holds adequate security); and
  4. all of the taxable Canadian property disposed of by the vendor is property for which the CRA has issued a certificate of compliance or is specifically “excluded property” under the Income Tax Act.

Essentially, the CRA are happy that they have received all of the necessary taxes if all of the withholding taxes were made with the proper approvals from CRA.  However, you may wish to consider filing a return if withholding taxes may have been overpaid.  You may find CRA guide #5013-G, General Income Tax and Benefit Guide for Non-Residents and Deemed Residents of Canada useful reading.  Note that a special rule to reduce the capital gain is available to U.S. residents who owned property on September 26, 1980.

This is a complex area, so work with a professional accountant and a lawyer familiar with the international rules.  (P.S. This is an area in which I no longer provide services.)

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum