Non-residents who sell Canadian real estate must complete certain Canadian tax reporting requirements in respect of the sale before taking their proceeds out of Canada.
Here is an overview of the steps involved:
1. Request tax clearance
Within 10 days of the transaction closing date, the non-resident must file a request for tax clearance (Form T2062 - Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) with the Canada Revenue Agency (CRA).
The filing establishes the amount of withholding tax to be remitted to the CRA from the proceeds of disposition before the remaining funds can be transferred out of Canada. A non-resident may file the clearance certificate request up to 30 days before the closing date, provided they have a signed agreement.
Without a clearance certificate, the purchaser may be liable up to 25 per cent of the sale proceeds as a withholding tax. Real estate attorneys typically reserve 25 per cent of the purchase proceeds in trust until the clearance certificate has been issued by the CRA.
Processing of the clearance certificate and the final tax return can each take as long as six months.
2. Pay the tax
Once the clearance certificate has been issued the certificate amount, that is, 25 per cent of the capital gain, must be remitted from the sale proceeds to the CRA. Any recaptured depreciation expense deducted against rental income will suffer a 50 per cent withholding tax rate.
If the non-resident did not report rental income then CRA will withhold the clearance certificate until tax returns to report the missed income are filed and assessed which may cause a delay of more than 12 months.
3. Recover a portion of your payment
The withholding tax paid by the non-resident is often greater than the actual tax calculated on the capital gain to be reported in a personal income tax return for the period in which the sale occurred. In those cases the non-resident is entitled to a tax refund which they may initiate by filing a Canadian tax return.