Property in the Lower Mainland continues to attract investors world-wide. So it’s important for buyers to understand Canada’s tax laws.
Here is a brief summary of information.
Resident or non-resident?
Under Canada’s income tax system, whether an individual is a resident or a non-resident status can play a significant role in how much tax they pay.
- A resident must pay Canadian income tax on his/her 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 a resident of Canada, you will not have to pay taxes owing on the sale of property in Canada until you file an income return for the year in which you sold 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.
Non residents and property ownership
A non-resident who buys a property and does not rent it, and does not earn income in Canada does not have to file an income tax return.
If the property is in British Columbia, the buyer will pay the BC Property Transfer Tax:
- 1% on the first $200,000
- 2% over $200,00 – $2 million
- 3% Over $2 million to $3 million
- 5% over $3 million.
Foreign nations, a foreign corporation, or a taxable trustee, must pay an Additional Property Transfer T known as the Foreign Buyers Tax on the proportionate share of a residential property transfer if the property is within specified areas of BC, – the Capital Regional District, the Fraser Valley Regional District, the Greater Vancouver Regional District, the Regional District of Central Okanagan and the Regional District of Nanaimo.
The rate is 20% for foreign buyers of property and does not apply to those in the BC Provincial Nominee Program.
If the property is in Vancouver, and is not a principal residence or rented for a minimum of six months each year, the non-resident they will have to file a Property Status Declaration and pay Vancouver’s Vacant Homes Tax at a rate of 1% of the property’s assessed value.
Non-residents and rental property
A non-resident property owner who rents their property is required to pay a 25% withholding tax on either gross or net rent and remit it monthly.
- Withholding tax on gross rent
A non-resident property owner withholding 25% of the gross rent is required to have a Canadian agent monthly remit the withholding tax to CRA within 15 days of each month-end with an NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada slip.
- 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 for expenses such as mortgage interest, property taxes and maintenance.
If CRA approves this change, 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,
The owner must appoint a Canadian agent to send the withholding tax to CRA by the 15th day of the month following the month during which the rental payment was paid or credited to the agent on the non-resident’s behalf. 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.
For information, visit www.cra.gc.ca and in the search box enter:
- Guide T4144, Income Tax Guide for Electing Under Section 216
- Form T1159, Income Tax Return for Electing Under Section 216
- Non-residents of Canada
- Rental income
For returns and guides for a non-resident owner filing a 216, visit www.cra.gc.ca and in the search box enter:
- Rental Income (T4036)
- Income Tax Guide for Electing Under Section 216 (T4144)
- Income Tax Return for Electing Under Section 216 (T1159)
- T2 Corporation – Income Tax Guide (T4012)
- T2 Corporation Income Tax Return (T2)
- T3 Trust Guide (T4013)
- T3 Trust Income Tax and Information Return (T3 RET)
When a non-resident sells a property
All non-resident sellers of Canadian property (including a pre-sale) must notify the CRA within 10 days of the date 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 held back.
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 and in the search box enter IC72-17R6)
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 claim a refund on their income tax for expenses related to the sale such as notary or legal fees, inspection and survey fees. REALTOR® commissions, when they file their tax return. This return must be filed by April 30.
Forms related to renting a property:
Undertaking to File an Income Tax Return by a Non-Residential Receiving Rent from Real Property (NR6)
Forms related to the sale of a property owned by a non-resident include:
- Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property;
- Form T2062A, 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; or
- Form T2062B, Notice of Disposition of a Life Insurance Policy in Canada by a Non-Resident of Canada.
The seller may also be required to provide one of the following forms:
- With Form T2062A, sellers should also complete Form T2062ASCH1, Disposition of Canadian Resource Property by Non-Residents if you are disposing of Canadian resource property; or
- With Form T2062B, life insurance companies should also complete Form T2062BSCH1, Certification and Remittance Notice to report the disposition of a life insurance policy.
Sellers should read: Disposing of or acquiring certain Canadian property.
Note: there have been cases where certificates are unavailable because of a backlog in processing requests by the CRA, buyers
This is an overview article. For information on 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).
For information contact Andrew Peck, Vice President and Managing Broker, Royal Pacific Realty Group at firstname.lastname@example.org.