Be aware of Non-Resident Withholding taxes!
The the general tax implications for a non-resident selling property in Canada is the requirement to remit withholding taxes off the selling price at a percentage of 25% for rental property and remit it to the CRA. It is common for the lawyer to do this; however, you should make sure you are aware of it.
If a non-resident is selling a property in Canada for $100,000, the original cost of the property was $60,000, the withholding tax would be 25% of $100,000, $ 25,000 will need to be remitted to the CRA, in case the property being sold is just a residential property (not rented out) the percentage increases to 50% of the selling price.
The withheld amount needs to be remitted by the lawyer to the CRA by the end of the next following month the property was acquired. For example, if the property was acquired in October, by the end of November 30th would be the due date for the remittance.
The seller should file a Section 116 income tax return by April 30th to obtain a refund of the excess taxes paid based on the actual capital gain.
Minimize Withholding taxes as Non-Resident Selling Property in Canada!
As a non-resident selling property in Canada, there is a strategy you can use to minimize your withholding taxes by filing a Section 116 Clearance Certificate before the closing date of the sale or no later than 10 days after the completed sale. You can reduce the withholding tax from 25% of the selling price to only 25% of the net capital gain!
If a non-resident is selling a property in Canada for $100,000, and the original cost was $60,000, the net capital gain would be $ 40,000, the withholding tax would be 25% of $40,000, totaling only $ $10,000.
The withheld taxes will be held in trust by the lawyer, once the CRA has approved the Section 116 Clearance certificate the representative for the non-resident seller will be contacted and the lawyers will then send the appropriate payment to the CRA. Once the CRA receives the payment, they will issue the official clearance certificate to the representative of the non-resident and any remaining funds held in trust will be released to the seller accordingly.
Plan ahead of time to Minimize taxes!
The Section 116 Clearance Certificate application can take six to eight weeks to fully process so it’s important you budget with time carefully. Here is realistic timeline on a property being sold by a non-resident.
A non-resident selling property in Canada has a property ready to be sold. He would like to minimize his withholding taxes.
The property is expected to be sold for $100,000 and the cost was $60,000. The goal is to avoid withholding $25,000 of tax which is the selling price of $100,000 x 25%, but instead $10,000 due to the Section 116 election, which is $100,000 minus $60,000 x 25%.
He will have a tax accountant file a Section 116 Clearance Certificate before the closing date of the sale or no later than 10 days after the completed sale. The lawyer will hold on to 25% of the selling price until the Section 116 Clearance Certificate is approved by the CRA. Once it has been approved and received from the seller’s representative, the lawyer will release the funds to seller above the threshold of 25% of the net capital gain.
The seller will file a Section 116 income tax return to further reduce the taxes (if possible) and receive and receive a refund.
Minimize your Liability as the Purchaser!
Make sure as the purchaser, you have a copy of the clearance certificate for your records and it is presented before funds are released to the seller. Generally, your lawyer will take care of all this for you; however, it is still good to have the awareness. The clearance certificate will fully protect the purchaser from any possible tax liability from the CRA, if the seller mentions the property is exempt from taxes be sure to request supporting proof from their tax accountant or lawyer in writing.
With the correct tax advice and advance planning, as a non-resident selling property in Canada, you can minimize your withholding taxes and efficiently sell Canadian real estate. Speak with one of our tax accountants today to let us help you minimize your taxes. Please also read our article on Becoming a Non-Resident of Canada if you will be planning to leave Canada for various reasons http://www.birdi.ca/becoming-a-non-resident-of-canada/
Author: Gurrai Birdi, CPA, CGA, MBA
Gurrai Birdi is a Chartered Professional Accountant (CPA, CGA, MBA) who has years of extensive experience in public practice working with highly satisfied individual and business clients to ensure there taxes are minimized and accounting needs are fulfilled.