When non-residents own real estate

Non-resident investors have played a part in boosting Canada’s booming condo and real estate market. And when they sell, the CRA will have its eye on a piece of the profit. The tax rules are complex, and if those investors do not follow them properly, it can result in significant liability.

Section 116 of the Income Tax Act requires payment of withholding tax when a non-resident disposes of taxable property. And it’s important that he or she obtain a clearance certificate from the CRA.

If no clearance certificate is obtained, the responsibility shifts to 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 a proposed or completed sale within 10 days of the disposition date. The request can be quite onerous to complete, and it should include the following required documents:

• completed prescribed forms T2062 and/or T2062A
• purchase and sale agreements
• copies of income tax returns and Notices of Assessment from prior years
• registered deeds on purchase
• registered deeds on sale

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, it will contact the non-resident’s representative, and the lawyers will make arrangements to send payment to the CRA.

Once payment is received, the CRA will issue the clearance certificate to the non-resident’s representative. The remaining funds that are held in escrow will be released and the sale can finally be considered complete.

The non-resident would still be expected to file a Canadian tax return to report the sale; however, he or she should claim the withholding taxes against his or her final tax liability, which would be based on the sale proceeds, less the cost of the property and any applicable selling costs.

Most non-residents aren’t aware of how complex the process can be when it comes time to sell real estate. It can even cause major headaches for a Canadian purchaser, who may inherit the tax burden.

Global housing markets heat up

Low short-term interest rates and pent-up demand are reinvigorating global property markets, states the Scotiabank global real estate trends report, released in September 2013.

“Inflation-adjusted home prices strengthened year-over-year in the second quarter in the majority of countries we survey,” said Adrienne Warren, a Scotiabank senior economist.

Improvement in the first half of 2013 is most notable in advanced nations, including the U.S. and the U.K., and prices are rising faster in some emerging markets, including China.

Canadian housing activity remains buoyant, though the fundamentals for continued gains are becoming less favourable.

Housing affordability at a national level is still at a historical average, but is expected to become a bigger challenge over the coming year with interest rates rising. Home prices also are staying strong.

“Potential overbuilding of condos in a number of major urban centres remains a concern” because demand is falling, she adds.

Jeanne Cheng, CPA, CA, is a senior tax manager, real estate and construction, at MNP LLP in Markham, Ont.