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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).

Section 116 of the Canadian Income Tax Act requires a purchaser to withhold income taxes when real estate is transferred from a non-resident of Canada. The same filing requirements apply whether property is sold or gifted, 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 Revenue Agency, or you 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, in which case the purchaser may withhold and remit 25% of the purchase price.

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 the certificate of compliance prior to the actual transaction date. 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 certificate is received. For this reason, the purchaser may wish to hold back a portion of the purchase price pending receipt of the certificate.

Prior to filing the Form, individuals without a social insurance number should contact the Canada Revenue Agency to obtain a “tax identification number”. 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.

At the end of the year, a personal tax return should be filed by the non-resident to calculate the actual taxes payable, and obtain a refund of excess taxes paid. Vendors of taxable Canadian property are required to file a Canadian tax return, for which CRA guide #5013-G, General Income Tax and Benefit Guide for Non-Residents and Deemed Residents of Canada may be useful reading.
For more details, refer to CRA Information Circular IC-72-17R5 and Interpretation Bulletin IT-173R2.

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