A lot of time when a non-resident sells their Canadian property they are in for a shock when they learn that their lawyer will be withholding 25% of the gross selling price to remit to the CRA.
Whenever somebody sells property in Canada the buyer’s lawyer is responsible for doing enough due diligence to determine whether the seller is a non-resident. In the case the seller the CRA requires that the lawyer withhold 25% of the gross selling price and remit it to the CRA by the end of the following month, in the situation that this is not done then the buyer becomes personally responsible for the withholding tax.
What can be done to reduce the withholding tax is to apply for a certificate of compliance (T2062). The certificate of compliances reduces the required withholding on the sale to 25% of the capita gain rather then 25% of the gross selling price. To apply for a certificate of compliance we must provide document to the CRA to support our original purchase price as well as attach a cheque for 25% of the capital gain. This application should be filed no later then 10 business days after the closing, upon receiving the application the CRA normally issues what is known as a comfort letter asking that the lawyer hold amount withheld in trust until the application is approved.
The amount withheld is an advance tax on the final tax liability. This is done by the CRA to ensure that they receive their share of taxes on the capital gains.
Afterwards the taxpayer must file a section 116 tax return this is done to calculate the final tax liability. In the section 116 return the payer reports their capital gains and claims a deduction for selling expenses such as real estate commission and lawyer fees. The benefit of filing the section 116 return is that the tax payer gets taxed at the incremental tax rate which is usually lower then the 25% advance tax which was originally paid to the CRA. In 2018 the tax rate for non-residents was 15% plus a 48% surtax
Just to illustrate John and Susan are non-residents and they decide to sell their vacation home in Canada for $300,000 prior to selling they had purchased the home for a $150,000. Upon closing their lawyer withholds $75,000 since they are non-residents. They then proceed to apply for a certificate of compliance and they then each pay the CRA $18,750 as withholding tax which is 25% of the capital gain (since the capital gain for each of them is $75,000). Upon receiving the certificate of compliance the lawyer then releases the $75,000 which was originally held back to them. Then in the following year before the April 30th year they then file a section 116 return and they claim the $10,000 which they paid their real estate agent and their lawyer as an expense. This reduces the capital gain for each of them to $70,000, their final tax liability would be $15,540 and they would each get a refund of $3,210 as they had previously submitted $18,750 as withholding tax to the CRA.
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The information provided on this page is intended to provide general information.
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