Buyers and Sellers Beware: Tax Rules for the Sale of Canadian Real Property

Are you a non-resident of Canada thinking about selling real property located in Canada?

Whether you hold the property for investment, rent it out, or use it as a vacation home, you should be aware of the Canadian tax rules that will apply when you sell the property.

Sellers

If you are a non-resident of Canada for tax purposes and selling real property in Canada, you must give notice to the Canada Revenue Agency (CRA) of the proposed disposition of, or of the completed disposition of, the property.  Notification is made using Form T2062 (and T2062A, if depreciable property such as rental property) and should be submitted to the CRA within 10 days of the closing date of the sale to avoid a penalty of up to $2,500 CAD.

When completing the form, you need to calculate the estimated capital gain (or loss) on the sale along with any depreciation recapture/terminal loss (if selling rental property).  The CRA will require you to pay at the time of the sale 25% of the estimated capital gain and the federal tax due on any recapture.  The buyer of the property assists in this process by withholding the tax from the gross proceeds due to you.  The CRA will issue you a certificate of compliance once the buyer has remitted the correct amount of tax.

The withholding amount is not your final Canadian tax liability.  You will need to file a Canadian non-resident income tax return to report the sale and calculate your actual income tax.  This return is due by April 30 of the year following the year of the sale.  You may get a refund or you may have a payment due if your final Canadian tax liability is more than the amount withheld.

If you do not have a Canadian tax ID number, you will need to apply for an Individual Tax Number (ITN) prior to filing your Canadian tax return.

Buyers

If you are buying property located in Canada from a non-resident of Canada, you are responsible for withholding 25% of the gross proceeds, regardless of whether or not you are a resident of Canada.  You should hold these funds in trust until the CRA provides remittance instructions.  Once the CRA processes the sellers Form T2062 (and T2062A, if necessary), the CRA will confirm the amount to pay and issue a certificate of compliance when the correct amount of tax has been received.  At this time, you can release any excess funds to the seller.

If you fail to withhold and remit the required tax, you could be held liable for the entire amount plus penalties and interest.

You should take reasonable action to confirm whether a seller is or is not a resident of Canada.

If you are thinking about selling or buying real property located in Canada, please contact your DMCL advisor.