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The Taxing Situation When Non-Residents Sell Canadian Real Estate

Author: Brad Howland
First Posted: Oct. 10, 2007

If you are a Canadian non-resident, and you sell rental property located in Canada, there is an demanding set of rules you must follow to meet your tax obligations to Canada.

You will be required to pay Canada Revenue Agency (CRA) 25% of the net capital gain on the property up front. When you calculate the net gain, you are not permitted to reduce it by any outlays or expenses related to the sale of the property, such as real estate commissions or legal fees. Rather, you must file a Canadian income tax return at the end of the year and claim your outlays on the return. In practice, this means that you may have to "lend" CRA tens of thousands of dollars for a period of several months, until you can file your return the following year.

You calculate your net capital gain by completing both of the following forms:

In addition, if the rental property was your principal residence for any of the years that you owned it (for example, you left Canada to take up residence in the United States, and began renting out your former house), you should complete:

Use the above forms to let CRA know about a proposed disposition (you will need to have a copy of the buyer's offer to purchase), or an actual disposition (you need the sales agreement). In the case of an actual disposition you must let CRA know within 10 days of the closing date or face stiff penalties: $25/day up to $2,500. There is a whole slew of other documentation required to substantiate your calculation–see the instructions for the forms.

It usually takes two to three months for CRA to process the forms, after which time they will issue a "certificate of compliance" (T2068 or T2064). If you informed CRA of a proposed disposition, and the actual amounts ended up being different from what was indicated on your original T2062/T2062A forms, you should file a new set of T2062/T2062A forms and obtain an updated compliance certificate.

Before the T2062/T2062A forms are filed and processed, CRA considers the purchaser to be liable to pay tax equal to 25% of the cost of the property, on behalf of the seller. This sounds appalling when you hear it at first, but in practice it generally means that the purchaser's lawyer will withhold 25% of the sale price from the seller and keep it in escrow.

Therefore, not only must you remit 25% of the net capital gain to CRA when you file the T2062/T2062A forms, but the lawyer will hold 25% of the sale price of your property for two to three months, until CRA gets around to processing the forms (there appears to be a growing backlog). Once the lawyers receive a copy of the clearance certificate they will release the rest of your funds. You should be prepared for this delay.

The forms come with a lousy set of instructions. It is highly recommended that a Canadian tax preparer experienced with Forms T2062/T2062A be engaged to complete them. You don't want anything to go wrong in this whole process!

Quebec Properties

For properties located in Quebec, a parallel set of provincial forms should be completed:

The provincial forms are used to calculate 12% of the net capital gain and remit it to the Ministère du Revenu du Quebec (MRQ). A big difference from the federal forms is that outlays are not specifically disallowed on the provincial forms, which means that real estate commissions and legal fees (notaire) can be included in your calculation when applying for a Quebec certificate of compliance. For this reason, a seller should not expect to receive much of a refund upon filing the Quebec income tax return.

In Section 2042 of Preparing Your Income Tax Returns (Michael G. Mallin; CCH Canadian Limited), it is mentioned that double taxation of the gain by Canada and Quebec can be relieved through "federal remission order," but there is no mechanism indicated to apply for this tax relief. In a recent set of Quebec/federal forms completed by Howland Tax Services, we simply included a letter with the federal forms asking for the remission order. We currently await the results of this request.

More Information

T4058 Non-Residents and Income Tax (2006)

Information Circular 72-17R5 Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116

Good Bets for Tax Preparers - T2062/T2062A Situations

David Ingram
Gary Gauvin
Howland Tax Services

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