What non-residents need to know about Canadian taxes and real estatePosted on September 18th, 2014
Property in the Metro Vancouver area continues to attract investors world-wide.
Here is a brief summary of tax information helpful to foreign investors.
Resident or non-resident?
Under Canada’s income tax system, whether an individual is a resident or a non-resident plays an important role in how much tax they pay.
- A resident must pay Canadian income tax on their worldwide income from all sources.
- A non-resident must pay Canadian income tax only on income from sources inside Canada.
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 you are considered to be a resident of Canada, you will not have to pay taxes owing on the sale of property in Canada until you file an income tax return for the year in which you sold a property.
You are a non-resident for tax purposes if you:
- 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.gc.ca and in the search box enter IT221R3. This will take you to a form, Determination of an Individual’s Residence Status. www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
If you would like a CRA opinion about your residency status, complete and submit Form NR74, Determination of Residency Status (Entering Canada). Visit www.cra.gc.ca and in the search box enter NR74. www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
Non-residents and property ownership
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. www.cra-arc.gc.ca/tx/nnrsdnts/pyr/prtxiii/cmpltng/menu-eng.html
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. www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
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) www.cra-arc.gc.ca/E/pub/tp/ic72-17r6/ic72-17r6-11e.pdf
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 RESOURCES box below for related guides and forms.
For information, visit www.cra.gc.ca and in the search box enter any of the following guide or form names or ID numbers.
Forms related to renting a property owned by a non-resident include:
- Non-residents of Canada www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html
- Rental Income (T4036, Line 126 Net & Line 160 Gross) www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/126/menu-eng.html
- Statement of Amounts Paid or Credited to Non-Residents of Canada (NR4) www.cra-arc.gc.ca/tx/nnrsdnts/pyr/prtxiii/cmpltng/menu-eng.html
- Undertaking to File an Income Tax Return by a Non-Resident Receiving
Rent from Real Property or Receiving a Timber Royalty (NR6) www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
- Income Tax Guide for Electing Under Section 216 (T4144) www.cra-arc.gc.ca/E/pub/tg/t4144/README.html
- Income Tax Return for Electing Under Section 216 (T1159) www.cra-arc.gc.ca/E/pbg/tf/t1159/README.html
- T2 Corporation – Income Tax Guide (T4012) www.cra-arc.gc.ca/E/pub/tg/t4012/README.html
- T2 Corporation Income Tax Return (T2) www.cra-arc.gc.ca/E/pbg/tf/t2/README.html
- T3 Trust Guide (T4013) http://www.cra-arc.gc.ca/E/pub/tg/t4013/README.html
- T3 Trust Income Tax and Information Return (T3RET) www.cra-arc.gc.ca/E/pbg/tf/t3ret/README.html
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) www.cra-arc.gc.ca/E/pbg/tf/t2062/README.html
- 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) www.cra-arc.gc.ca/E/pbg/tf/t2062a/README.html
- Notice of Disposition of a Life Insurance Policy in Canada by a Non-Resident of Canada (T2062B) (if applicable) www.cra-arc.gc.ca/E/pbg/tf/t2062b/README.html
- 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. www.cra-arc.gc.ca/E/pub/tp/ic72-17r6/ic72-17r6-11e.pdf
The seller may also be required to provide one of the following forms:
- With Form T2062A, sellers should also complete the Disposition of Canadian Resource Property by Non-Residents if you are disposing of Canadian resource property (T2062ASCH1) www.cra-arc.gc.ca/E/pbg/tf/t2062asch1/README.html
- With Form T2062B, life insurance companies should also complete the Certification and Remittance Notice to report the disposition of a life insurance policy (T2062BSCH1) www.cra-arc.gc.ca/E/pbg/tf/t2062bsch1/README.html
- Determination of an Individual’s Residence Status (IT221R3) www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
- Determination of Residency Status (Entering Canada) (NR74) – for a CRA opinion on residency status www.cra-arc.gc.ca/E/pub/tp/it221r3-consolid/it221r3-consolid-e.pdf
- 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 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.
Andrew Peck, Vice-president and general manager, Royal Pacific Realty Group
Source: Real Estate Board of Greater Vancouver