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 tax resident of Canada you are required to report the sale of property on your Canadian income tax return, whereas the process for Canadian non-residents is more complex with various filings and requires the involvement of an expert accounting firm and real estate lawyer.
When a Canadian property (in this article we are specifically referring to Canadian real estate) is sold by a non-resident of Canada (for tax purposes), the lawyer is required to hold in trust 25% of the gross proceeds of the sale for the non-resident’s share of the property, until the issuance of the Certificate of Compliance by the CRA. Additional tax may be withheld for rental property and properties located in Quebec. 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 up to a maximum of $2,500 per non-resident owner. The purpose of this application is to calculate 25% of your net capital gain, not including selling expenses. Selling expenses are captured at a later date on the Non-Resident Canadian Income Tax Return to report the sale of property. Once the application is reviewed and assessed, the CRA will request a payment of 25% of the net capital gains from the funds being held in trust by the real estate lawyer. Upon receipt of the final Certificates of Compliance 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 specific elections so the property continues to be deemed as your principal residence for an additional year, resulting in a deferral of 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 include 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 hefty 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!