Posted by: Daryl & Wendy Ashby | February 26, 2010

Non-resident Sales are Taxed

Moving house can be pretty stressful, when you have to line up all the finances, paperwork, packing up, getting a moving truck and so on. However, if it is a move out of the country, there are still more things to consider.

In a standard Agreement of Purchase and Sale, a person selling their home in Canada must be able to declare that, for the purposes of Canadian taxation, they are a resident of Canada. If he cannot, he must provide the purchaser with a certificate of compliance from the Canada Revenue Agency (CRA). While most of us think that proceeds from the sale of a principle residence are not taxed, that doesn’t hold for non-residents. Profit from the sale of a property may be subject to capital gains tax unless an exemption is obtained from the CRA.

(To determine whether you are a non-resident for income tax purposes, visit the CRA’s website at cra-arc.gc.ca/tx/nnrsdnts/ndvdls/nnrs-eng.html.)

“When a non-resident taxpayer sells taxable Canadian property – which includes real estate – they are required to file for a 116 Tax Certificate (Form T2062) with CRA within 10 days of the sale,” says Tannis Dawson, a tax and financial planning expert with Investors Group.

The certificate can take two to three months to obtain; in the absence of the certificate, the buyer becomes liable for any tax owed by the non-resident seller.

“If the seller leaves and doesn’t pay the tax, the government has decided it has the right to collect against the buyer,” says Ray Leclair, real estate lawyer and vice-president at TitlePLUS. “So, to protect the buyer, it put in a provision that says if the seller is a non-resident, the buyer has the right to withhold up to 25% of the purchase price” until the seller produces a certificate of compliance from the CRA. That withheld amount is put in a trust account by the buyer’s solicitor.

Caroline Blake, a British citizen who was a Canadian resident, moved to a new job in the U.K. and then sold her Toronto home. She says her solicitor first told her about the need to obtain this tax certificate a couple of weeks before closing. At the time the deal closed, the buyer of her Toronto property had the right to withhold 25% of the purchase price until Ms. Blake was able to provide the certificate. However, Ms. Blake’s solicitor had assured her that even with the 25% withholding tax, there was enough equity in the home to cover closing costs and pay off the mortgage. Ms. Blake returned to Canada last month to finalize the sale of her home.

“The night before I flew back, the solicitor sent me an email, effectively saying, ‘Whoops, sorry, I made a mistake. There isn’t enough equity in the house. Could you please come with a $32,000 cheque,'” says Ms. Blake. “I sent her a very curt note saying, ‘We’ve left the country – it’s not as if we have a spare $32,000 in our Canadian bank accounts, so you’d better come up with an alternative.'”

Because Ms. Blake sold her home after she had left Canada, she was not allowed to sign the declaration saying she was a resident for tax purposes. But because she sold her house at a loss, she will not have any capital gains to be taxed. In order to close the sale, her real estate agent and the buyer’s agent agreed to wait for their commissions until the compliance certificate is obtained and the 25% withholding tax is released.

Advisors say this situation could have been avoided.

“They could have got this certificate before they started marketing, as soon as they knew they were selling the property,” says Mr. Leclair. This would then have been given to the buyer so they would not be on the hook for any unpaid tax.

Ms. Dawson says the CRA will issue a certificate before a sale actually occurs, using the price you expect to get for the property. If there is tax payable, the seller pays the tax or provides security to the CRA that the tax will be paid (just what this security could consist of, the CRA says “you or your representative should contact the Revenue Collections Division of the applicable Tax Services Office.”)

The seller must file a tax return for the year the sale of the home took place. Any overpayment of the tax can be refunded. Other costs such as real estate fees, legal fees, and any other closing costs could be set off on your general taxes against any gain to reduce the tax you may have to pay.

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