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**This post was originally created by Jeanne Cheng of MNP
It is a well-known fact that non-resident investors have played a part in Canada’s booming condo market. And when these investors finally decide to sell, the Canada Revenue Agency (CRA) certainly wants a piece of that profit. The tax rules surrounding this process are complex, and if not followed properly, can result in a very significant tax liability.
When a non-resident disposes of taxable Canadian property (such as a condo located in Canada, or other Canadian real estate), section 116 of the Income Tax Act requires payment of withholding tax. The non-resident must obtain a clearance certificate from the CRA. Here’s why it is important for all parties involved to make sure this is done: if the certificate is not obtained, the responsibility shifts onto the purchaser to remit either 50% of the purchase price for depreciable property or 25% of the purchase price for other capital property.
Getting a clearance certificate
A non-resident can request a certificate of compliance from the CRA for either a proposed sale, or a completed sale, within 10 days of the date of disposition. You’ll need the T2062 and/or T2062A forms as well as appropriate calculations and documents when making the request, which should be completed by a competent professional.
The appropriate withholdings (25% of the capital gain on the sale, based on sale proceeds less the cost of the property, plus any applicable recapture tax) will be held in escrow by the purchaser’s lawyer. After the CRA has reviewed and approved the request, the representative for the non-resident will be contacted, and arrangements will be made by the lawyers to send the appropriate payment to the CRA. Once the payment has been received, the CRA will issue the clearance certificate to the representative of the non-resident, the remaining funds held in escrow will be released and the sale can finally be considered complete.
The non-resident is still expected to file a Canadian tax return for that taxation year to report the sale; however, the individual should claim the amount of withholding taxes that were paid during the above process against his or her final tax liability. This tax liability will be based on sale proceeds less cost of the property and less any applicable selling costs.
Unfortunately, most non-residents are not aware of the complexity of the process involved with the Canadian tax authorities when it comes time to sell. It can even be a considerable headache for a Canadian purchaser, who may inherit the tax burden. Bringing an experienced tax advisor in at an early stage makes the process that much easier for all parties.
Related Topics:Canada Revenue Agency
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