What foreign property buyers need to know about taxes

Posted on June 1st, 2017

Property in the Lower Mainland continues to attract investors world-wide. So it’s important for REALTORS’® clients to understand Canada’s tax laws to help them better avoid mistakes and pitfalls.

Here is a brief summary of information relevant to REALTORS® with clients who are foreign investors.

Property Transfer Tax
Home buyers in British Columbia pay a Property Transfer Tax (PTT) on the fair market value of a property at a rate of:

  • 1% on the first $200,000
  • 2% on the balance up to and including $2,000,000
  • 3% on the balance greater than $2,000,000

Qualifying first-time buyers may be exempt from paying the PTT on a resale home priced up to $500,000. There is a proportional exemption for homes priced between $500,000 and $525,000. At $525,000 and above the rebate is nil. Learn more. 1.250.387.0604.

Foreign Buyers Tax – Metro Vancouver

Foreign entities including individuals and corporations will also pay a 15% additional Property Transfer Tax (known as the Foreign Buyers Tax) when they buy a home in the Metro Vancouver area. Learn more.

Foreign nationals with work permits coming through the BC Provincial Nominee Program are exempt from the 15% additional Property Transfer Tax (known as the Foreign Buyers Tax) when they buy a home. Learn more.  Property classified as farm land or as part of the Agricultural Land Reserve may be exempt from the additional 15% PTT.

Vancouver Vacant Homes Tax
Anyone owning a residential property in the City of Vancouver which is not used as their principal residence or is not renting the home will be assessed a one per cent tax each year. On a $1-million home left vacant, the tax would be $10,000 annually. Learn more.

Resident or non-resident?
Under Canada’s income tax system, whether an individual is a resident or a non-resident status 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.

If 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 return for the year in which they sold property.

Non-residents
Your client is a non-resident for tax purposes if they:

  • live in another country and are not considered a resident of Canada;
  • do not have significant residential ties including a home, spouse or common law partner or property in Canada; and
    • live outside Canada throughout the tax year; or
    • stay in Canada for less than 183 days in the tax year.

For information visit www.cra-arc.gc.ca and in the search box enter IT221R3. This will take you to a form, Determination of an Individual’s residence status.

If your client would like a CRA opinion about their residency status, they 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 remit it 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 monthly remit the withholding tax to CRA within 15 days of each month-end with an NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada slip.

  1. 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 for expenses such as mortgage interest, property taxes and maintenance.

If CRA approves this change, 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,

They must appoint a Canadian agent to send the withholding tax to CRA by the 15th day of the month following the month during which the rental payment was paid or credited to the agent on the non-resident’s behalf. 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.

For information, visit www.cra.gc.ca and in the search box enter:

For returns and guides for a non-resident owner filing a 216, visit www.cra.gc.ca and in the search box enter:

Please read New rules for the capital gains Principal Residence Exemption

When a non-resident sells a property
All non-resident sellers of Canadian property (including a pre-sale) must notify the CRA within 10 days of the date 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 held back.

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 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 claim a refund on their income tax for expenses related to the sale such as notary or legal fees, inspection and survey fees. REALTOR® commissions, when they file their tax return. This return must be filed by April 30.

Forms related to the sale of a property owned by a non-resident include:

The seller may also be required to provide one of the following forms:

Sellers should read: Disposing of or acquiring certain Canadian property.

Note: there have been cases where certificates are unavailable because of a backlog in processing requests by the CRA, buyers

For information on 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).

Sources
Canada Revenue Agency
REBGV