Resident or non-resident?
Under Canada's income tax system, whether an individual is a resident or a non-resident 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 your client is considered a resident of Canada, they will not have to pay taxes owing on the sale of property in Canada until they file their income tax return for the year in which they sold the property.
Your client is a non-resident for tax purposes if they:
*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.
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 have it remitted monthly.
1. Withholding tax on gross rent
A non-resident property owner withholding 25% of the gross rent is required to have a Canadian agent remit the withholding tax to CRA within 15 days of each month-end together with Form NR4 Statement of Amounts Paid or Credited to Non-Residents of Canada.
2. 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 expenses such as mortgage interest, property taxes and maintenance.
If CRA approves withholding on the net rent, rather than gross rent, then 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.
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.
When a non-resident sells a property
All non-resident sellers of Canadian property (including assigning a pre-sale) must notify the CRA within 10 days of the day of 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 used as a holdback.
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.
When a non-resident owners 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 to claim a refund on their income tax for expenses related to the sale such as notary or legal fees, inspection and survey fees, and REALTOR commissions, when they file their tax return. This return must be filed by April 30.
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Thanks, Carmen Leal