Property in the Lower Mainland continues to attract
investors world-wide. It is therefore important to understand Canada’s tax laws
to help avoid mistakes and pitfalls. Here is a brief summary of information
relevant to foreign investors.
Resident or
non-resident?
Under Canada’s income tax system, whether an individual is a
resident or a non-resident can play a significant role in how much tax they
pay.
·
A resident must pay Canadian income tax on
his/her worldwide income from all sources.
·
A non-resident must pay Canadian income tax only
on income from sources inside Canada.
Residents
Canada Revenue Agency (CRA) defines a resident as someone
who has lived in Canada for a minimum of 183 days within the past year.
Your client is considered a resident of Canada, they will
not have to pay taxes owing on the sale of property in Canada until they file
their income tax return for the year in which they sold the property.
Non-residents
Your is a non-resident for tax purposes if they:
·
Live in another country and are not considered a
resident of Canada;
·
Do not have a significant residential ties
including a home, spouse or common law partner or property in Canada; and
o
Live outside Canada throughout the tax year; or
o
Stay in Canada for less than 183 days in the tax
year.
For more information visit www.cra.gc.ca
and in the search box enter IT221R3. This will take you to a form, Determination of an Individual’s Residence
Status.
If you would like a CRA opinion about your residency status,
you should complete and submit Form NR74, Determination
of Residency Status (Entering Canada). Visit www.cra.gc.ca
and in the search box enter NR74.
Non-residents and
property ownership
A non-resident who buys a property and does not rent it, and
does not earn income in Canada does not have to file an income tax return.
Non-residents and
rental property
A non-resident property owner who rents their property is
required to pay a 25% withholding tax on either gross or net rent and have it
remitted monthly.
1. Withholding tax on gross rent
A non-resident property owner withholding
25% of the gross rent is required to have a Canadian agent remit the
withholding tax to CRA within 15 days of each month-end together with Form NR4 Statement of Amounts Paid or Credited to
Non-Residents of Canada.
2. Withholding tax on net rent
A non-resident property owner can apply to
have the 25% withholding tax applied to net income instead of gross income,
under Section 216 of the Income Tax Act.
This will allow the owner to deduct expenses such as mortgage interest,
property taxes and maintenance.
If CRA approves withholding on the net rent, rather than
gross rent, then non-resident property owners must file Form NR6, Undertaking to File an Income Tax Return by
a Non-Resident Receiving Rent from Real Property or Receiving a Timber Royalty.
When filing Form NR6, the owner or property manager must
still report the gross amount of rental income for the entire year on Form NR4.
A non-resident owner must also file a Section 216 income tax
return for that year even if the property owner has no tax payable or no refund
coming. See RESOURCES box below for related guides and forms.
When a non-resident
sells a property
All non-resident sellers of Canadian property (including
assigning a pre-sale) must notify the CRA within 10 days of the date of the
property sale to obtain a Certificate of Compliance and remit 25% of any
capital gain (profit).
The Certificate of Compliance is proof that the CRA has
received prepayment of the taxes owing on profits. The tax is 25% or more of the
difference between the sale price and the cost of the property including
improvements made during ownership.
If the seller doesn’t obtain a Certificate of Compliance,
their notary or lawyer must withhold and remit 25% of the gross proceeds of the
sale to CRA.
Buyers also typically request a holdback of 25% or more of
the purchase price until the Certificate of Compliance is delivered. This is to
protect the buyer. If a seller were to disappear without paying the required
taxes, the buyer would be liable for those taxes.
Sellers taking a loss on a property must obtain a
Certificate of Compliance; otherwise 25% of the sale price will be used as a
holdback.
When a non-resident owner sells a Canadian property that has
never been rented, they must complete a Section 116 income tax return,
Procedures Concerning the Disposition of Taxable Canadian Property by
Non-Residents of Canada – Section 116. (Visit CRA website and in the search box
enter IC72-17R6)
When a non-resident owner sells a Canadian property that has
been rented, they must complete a Section 216 income tax return in the year
after the sale. This allows them to claim a refund on their income tax for
expenses related to the sale such as notary or legal fees, inspection and
survey fees, and REALTOR® commissions,
when they file their tax return. This return must be filed by April 30. See
RESOUCES box below for related guides and forms.
RESOURCES
For information, visit www.cra.gc.ca
and in the search box enter any of the following guide or form names or ID
numbers.
RENTING
Forms related to renting a property owned by a non-resident
include:
·
Non-residents
of Canada
·
Rental
Income (T4036, Line 126 Net & Line 160 Gross)
·
Statement
of Amounts Paid or Credited to Non-Residents of Canada (NR4)
·
Undertaking
to File an Income Tax Return by a Non-Resident Receiving Rent from Real
Property or Receiving a Timber Royalty (NR6)
·
Income Tax
Guide for Electing Under Section 216 (T4144)
·
Income Tax
Return for Electing Under Section 216 (T1159)
·
T2 Corporation – Income Tax Guide (T4012)
·
T2
Corporation – Income Tax Return (T2)
·
T3 Trust
Income Tax and Information Return (T3RET)
SELLING
Forms related to the sale of a property owned by a
non-resident include:
·
Request by
a Non-Resident of Canada for a Certificate of Compliance Related to the
Disposition of Taxable Canadian property (T2062)
·
Request by
a Non-resident of Canada for a Certificate of Compliance Related to the
Disposition of Canadian Resource and Timber Resource Property, Canadian Real Property (other than Capital
Property) or Depreciable Taxable Canadian Property (T2062A)
·
Notice of
Disposition of a Life Insurance Policy in Canada by a Non-Resident of Canada
(T2062B) (if applicable)
·
Procedures
Concerning the Disposition of Taxable Canadian Property by Non-Residents of
Canada – Section 116 (IC72-17R6) – when selling a property that was never
rented.
The seller may also be required to provide one of the
following forms:
·
With Form T2062A, sellers should also complete
the Disposition of Canadian Resources
Property by Non-Residents if you are disposing of Canadian resources
property (T2062ASCH1)
·
With Form T2062B, life insurance companies
should also complete the Certification
and Remittance Notice to report the disposition of a life insurance policy
(T2062BSCH1)
IN GENERAL
·
Determination
of an Individual’s Residence Status (IT221R3)
·
Determination
of Residency Status (Entering Canada) (NR74) – for a CRA opinion on
residency status
·
For additional information sellers should read
this guide: Disposing of or acquiring
certain Canadian property found at www.cra.arc.gc.ca/tx/nnrsdnts/cmmn/dsp/menu-eng.html
For more information contact CRA at: 1.855.284.5946 from
Canada or the United States; or 613.940.8499 from outside Canada and the United
States. CRA accepts collect calls.
