IMPORTANT: This is not tax advice. Talk to an accountant. Do not delay addressing this issue with an accountant as it will delay receipt of the proceeds of your sale. This information is provided by me for information only so you can understand why there may be a hold back from the sale proceeds.
Canadians who purchase Taxable Canadian Property (TCP) from non-residents of Canada could be liable for taxes of up to 50% of the purchase price if the Purchaser and the Seller fail to comply with the reporting and withholding requirements governed by section 116 of the Income Tax Act (Act).
This applies where the Seller of a property is Non-Resident of Canada. Eg the seller lives in the USA and is selling their vacation home in Canmore. The Seller is to pay the tax but the Purchaser is liable to the CRA if the Seller does not pay them.
- Real property that is situated in Canada.
The Canadian government has the right to tax a non-resident’s sale of TCP. The tax is calculated on either capital gain or income realized on the disposition.
When acquiring TCP from a non-resident, the purchaser is required, under section 116, to withhold 25% (or 50%, in certain cases) of the purchase price to cover the non-resident’s potential Canadian tax liability.
In addition to setting out the purchaser’s remittance obligation, section 116 also sets out the non-resident vendor’s compliance obligations. The rules in section 116 seem to overlap, but the ultimate goal is to ensure that vendors comply with the reporting and remittance requirements. The respective obligations of the purchaser and the vendor are discussed in greater detail below.
A purchaser, wherever resident, is obligated to remit 25% of the purchase price to the Canada Revenue Agency (CRA) within 30 days from the end of the month in which the property was acquired. Example, if the sale is anytime in July then it would be 30 days from July 31. There is an exemption, however, for excluded property. For certain types of properties, such as real property inventory, the withholding is 50% of the purchase price.
As the amount remitted does not necessarily represent the vendor’s actual tax liability, any excess can be refunded to the vendor after it files a Canadian tax return to report the disposition of TCP.
The purchaser is relieved from the withholding obligation if it receives a clearance certificate from the vendor. The clearance certificate is issued by the CRA, and confirms that the CRA has received the required information and adequate withholding tax from the vendor.
To obtain the clearance certificate, a non-resident vendor must notify the CRA of the following within 10 days of the disposition of TCP and before the purchaser’s remittance due date:
- The name and address of the purchase;
- A description of the property; and
- A statement of proceeds of disposition of the property and the amount of its adjusted cost base (ACB).
The vendor is also obligated to remit to the CRA 25% of the gain realized on the disposition (not on the purchase price), or must provide adequate security. If there is no gain, no remittance is required.
After receiving the notification, supporting documents, and payment (if any is due), the CRA issues a clearance certificate to the vendor. As the vendor has already remitted the required amount (25% of the gain) to the CRA, the purchaser is no longer obligated to withhold.
It is noteworthy that a clearance certificate may be required even if the disposition is the result of a tax-deferred transaction such as a subsection 85(1) rollover. Therefore, for the purposes of section 116, the underlying transaction should be reviewed carefully.
Comfort letter and voluntary notification
The CRA’s policy is to issue the clearance certificate within 30 days; in practice, however, some of the more complex transactions can make the application process take much longer. In such cases, the CRA usually issues a “comfort letter” before the purchaser’s remittance due date, to allow the purchaser to continue holding the funds until the certificate is issued. It is my understanding the CRA no longer issues comfort letters.
As the timeline for applying for the certificate is tight, the vendor can also apply for the certificate voluntarily, prior to the disposition. Note, however, that section 116 requires the vendor to notify the CRA of any changes to the information on the voluntary notification within 10 days of the disposition; in addition, the vendor must remit any insufficient withholding within 10 days of the disposition.
Penalties and fines
If a required withholding is not remitted, the purchaser is liable to pay the un-remitted amount, plus interest and penalty. The purchaser is entitled to recoup the tax from the non-resident vendor, if possible. The vendor may be subject to a penalty of up to $2,500 on failure to notify the CRA. Failure to make the required notification is also an offense under the Act, and the vendor could be subject to a fine of up to $25,000, or imprisonment.
HOW IT WORKS FROM THE LAWYER SIDE OF THINGS
Generally this is what happens subject to agreement between both the seller and buyer’s lawyer:
Buyer’s lawyer will hold 25% of the total sale price (this is 25% of the sale price NOT the “profit” – If the net sale proceeds are less that 25% of the purchase price, you will have to advance any shortfall) in trust on the following conditions:
- If the Clearance Certificate pursuant to the Canada Income Tax Act, or other written evidence as provided by the Canada Revenue Agency stating that they have no further interest in the property is provided to the Buyer’s lawyer prior to the remittance deadline (being 30 days of the end of the month in which the closing occurs, then upon receipt the lawyer is to forward the 25% holdback funds to my office unconditionally for release to the seller.
In the event that the CRA provides written notice of the assessed tax amount prior to issuing the Clearance Certificate and prior to the remittance deadline, then upon the buyer’s lawyers receipt of the notice the lawyer will submit the assessed amount directly to the CRA and this amount will be taken from the holdback funds. You will provide me with confirmation of this. The buyer’s lawyer will continue to hold the balance of the funds until the Clearance Certificate is received.
- If the buyer’s lawyer does not receive the Clearance Certificate prior to the remittance deadline above, then the lawyer is authorized to remit the funds held back directly to the CRA to the account of the sellers (seller identifying information to be provided if required at that time) with copies of the remittance information to be provided to my office. Once your return is processed, the CRA will refund any difference directly to the seller.