Updated: Oct 5, 2022
The process of disposing (selling) a Canadian property while an individual is considered a “non-resident” for tax purposes is unlike the process for Canadian residents.
As a Canadian resident, you are required to report the sale of property on your regular annual income tax return, whereas the process for Canadian non-residents is more complex and requires the involvement of an expert accounting firm and real estate lawyer.
When a taxable Canadian property (in this article we are specifically referring to Canadian real estate) is sold by a non-resident, your lawyer is required to hold in trust 25% of the gross proceeds of the sale for your share of the property, until the issuance of the Certificate of Compliance by the CRA. An application to request the Certificate of Compliance must be submitted within 10 days of the property sale or you will be subject to penalties of $25/day (minimum of $100) to a maximum of $2,500. This application is used to calculate 25% of your taxable net capital gain, not including selling expenses. Selling expenses are captured at a later date on your non-resident Canadian “Sale of Property Return.” Once the application is reviewed and assessed, the CRA will request a payment of the withholding tax and then the remainder of funds held in trust by the lawyer can be released to you.
If this property was used as a principal residence, you may be eligible for a full or partial Principal Residence Exemption on tax owing, depending on whether the use of the property changed from a principal residence to a rental property or if an election was filed. When a change in use occurs, you can submit an election so the property continues to be deemed as your principal residence for an additional number of years, resulting in an exemption from capital gains.
Following the year of sale, non-residents are required to file an income tax return to report the sale of property by April 30. On this return, you are allowed to claim selling expenses related to the property sale, such as legal fees and realtor commissions. By claiming selling expenses on this return, you are ultimately reducing your capital gains and will most likely receive a refund (if there was tax remitted).
Important to note, failing to comply with the CRA’s requirements when disposing a property as a non-resident can result in the purchaser of your property inheriting your tax burden. Engaging the services of a professional accounting firm to guide you through this intricate process is vital, so that neither you or the other parties involved are faced with complications in the future!