If you are buying Canadian real estate it is important to know whether the seller is a “resident” of Canada or not. If the seller is a non-resident of Canada, you may be required to make a withholding from the payment of the purchase price to the seller, and to remit the amount withheld to the Canada Revenue Agency (“CRA”). If withholding is required, you are liable to the CRA for the withholding, even if you fail to make the withholding from the payment to the seller.
“Resident” means the seller is resident in Canada for income tax purposes. This should not be confused with the seller’s immigration status in Canada. “Resident” has a different meaning for income tax purposes than it does for immigration purposes.
Generally, you will not be liable for the withholding if after reasonable inquiry you have no reason to believe that the vendor is not resident in Canada.
Standard real estate contracts generally have a section where the seller declares whether they are a resident of Canada, or a non-resident of Canada for income tax purposes. Although the declaration is helpful, it may not be sufficient to protect you from liability. Pay attention to other factors which should cause you to question the veracity of the declaration, such as:
- The seller / their realtor can only be contacted at unusual times of day. Perhaps the seller is in a different time zone.
- The seller has a foreign mailing address or telephone number.
- The property is vacant.
- The property is vacant and the seller gives the property address as their address.
In addition, your liability may be limited or eliminated if the seller obtains a clearance certificate from the CRA. If the final selling price does not exceed the price shown on the clearance certificate, then you should not have any liability. However, if the final selling price exceeds the price shown on the clearance certificate, then you are required to make a withholding based on the difference.
The amount that you are required to withhold depends on the seller’s use of the property you are purchasing. For example, if the seller is using the property as their residence, then generally the required withholding is 25% of the purchase price (or 25% of the difference if the seller obtains a clearance certificate). However, if the seller is using the property as a rental property, then the required withholding is 25% of the purchase price for the land and 50% of the purchase price for the building. Therefore, it is important that you understand how the seller is using the property.
If there is any doubt about the seller’s tax residence or the use of the property, then the best thing to do is to withhold the required amount from the payment of the purchase price and remit the withholding to the CRA. The remittance must be made within 30 days of the end of the month in which you acquired the property.
How We Can Help
Contact the DMCL tax team for help navigating the tax considerations of purchasing Canadian real estate.