What Non-Residents need to know before investing in Canada’s real property

Interested in investing in Canadian real estate market?  Many overseas non-residents are showing tremendous interest in  recent years but not everyone aware of the extensive taxation responsibilities when purchasing and selling Canadian properties!  Non-residents may face unexpected costs under the Canadian tax system without a proper understanding of our Canadian tax regulations.

In general, non-residents of Canada may be subject to Canadian taxes on the two income sources from real estate properties– rental income and capital gain, along with various filing requirements.

RENTAL INCOME

Under the Income Tax Act , an individual is deemed to be a non-resident of Canada if he/she is primarily a resident of another country under the residency provisions of a tax treaty between that country and Canada, regardless of Canadian domestic residency rules.

Income earned in Canada by non-residents from rental property is subject to federal tax levied at a flat rate of 25% that is withheld at the source.  However, a non-resident may elect to pay tax on net rental income from Canadian real property vs 25% on the gross rent.

Responsible parties and actions required:

  • Non-residents to apply for a Canadian individual tax number.
  • The tenant or property manager is required to remit the 25% withholding tax to CRA on a monthly basis. The CRA will learn about this if the non-resident has never remitted this withholding tax to CRA when the non-resident requests a clearance certificate at sale.  This could result in substantial interest and penalties due to the non-compliance.  The CRA can assess the failure to deduct penalties of 10% or 20% to the second or later failures under circumstances of gross negligence, as well as failure to remit penalties based on number of days late from 3% to 10%.
  • The tenant or property manager is required to report the income and withholding tax on an NR4 information return on an annual basis and issue a NR4 slip to the non-resident. There is penalty for failure to file NR4 return and NR4 slips.
  • Non-resident to file an income tax return under section 216 of the ITA to get a refund on any withholding tax submitted to CRA over and above any amounts owing.

CAPITAL GAIN

Non-residents are subject to Canadian income taxes on the gains from the disposition of the taxable Canadian property.  Non-residents are also subject to a Canadian withholding tax, which must be deducted and remitted to the CRA by the purchaser equal to 25% (or potentially 50%) of the gross sale proceeds within 30 days after the end of the month of closing.  To avoid this, the non-resident sellers may obtain the tax clearance certificates from CRA to base the withholding tax on their net gain and pay that tax to the CRA—which means the seller will not receive the full proceeds of the purchase price unless a clearance certificate is obtained.  The withholding tax may be claimed on their Canadian tax returns against the final tax liability and any excess withholding tax should be refunded after filing.

Responsible parties:

  • The purchaser’s lawyer should be involved in the process as it is the purchaser’s responsibility to hold back the funds.
  • The seller should contact their accountant to calculate the capital gain and recapture, and to submit clearance certificate application prior closing.
  • The seller’s accountant will communicate with CRA for the clearance certificate application and calculate the withholding tax on the net gain, not on the gross proceeds. The accountant would also notify the purchaser’s lawyer when the clearance certificate is issued.
  • The seller’s lawyer would remit the withholding to CRA once obtained the clearance certificate and send the balance of the holdback to the non-resident seller.
  • The seller’s accountant to file the final tax return for the disposition of the property to get a refund on any withholding tax submitted to CRA over and above any amounts owing.

This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.