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Non-Resident Sellers & The Tax Implications

This article reviews the basic process for transactions involving a sale by a Vendor who is a Non-Resident.

While the content of this post should be considered reliable and informative, this should not be considered legal advice and we recommend that you contact our firm directly should you have any questions.

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NON-RESIDENT SELLERS

• For all transactions involving a sale by a Vendor who is a Non-Resident for income tax purposes, a Certificate of Compliance from Canada Revenue Agency (“CRA”) must be obtained. If not, the Buyer will be responsible for paying taxes due and any penalties!

• The sale of an interest in Canadian real property is a Taxable Canadian Property (as defined in the Income Tax Act) (“TCP”). (This includes personal use home, rental properties and land building held as inventory)

• Non-Residents (Note 1) who dispose of a TCP are required to obtain a (“Certificate of Compliance”) from CRA, commonly referred to as a “Clearance Certificate” (Note 2)

• Income taxes payable are basically 25% of the excess of the sale price over the adjusted cost base of the TCP. (Note 3)

• The correct CRA form is completed and filed and once approved by CRA, a certificate of compliance is issued.

• The request for a certificate of compliance form (Form T2062) must be remitted, by Registered Mail, within 10 days of the sale.


THE BASIC PROCESS:

• The Seller’s Lawyer withholds at least 25%, but up to 50% of the Selling Price (Note4) from the Seller and gives the Seller 50%-75% of the Selling Price. The Seller’s Lawyer is on an undertaking to provide the Buyer’s Lawyer with a Clearance Certificate.

• The Seller will need to hire a Canadian accountant to file the required documentation. (Note5)

• The necessary form, with supporting documents and required withholding tax, which will be provided by the Seller’s Lawyer to the Accountant from the 25% holdback funds, will be prepared and forwarded to CRA.

• CRA will review the submission; advice of changes needed or confirm all is good and issue a Clearance Certificate. This can take from two weeks to three months.

• Once the Clearance Certificate is issued, the Seller’s Lawyer will provide a copy to the Buyer’s Lawyer and the Seller and then release the balance of the holdback funds.

• Take Away 1: Vendor who thinks they may be considered a Non-Resident for tax purposes should speak with their accountant as soon as they decide to list the property for sale to minimize delays in the release of their sales proceeds.

• Take Away 2: Make sure your Vendor has at least 25% of the sales proceeds (either in equity or in savings), otherwise he will not be a position to close the deal.


Note 1

• The Income Tax Act (“ITA”) defines a non-resident as “not resident in Canada.” Whereas the ITA does not define residency.

• The ITA S 250(1) sets out the rules on Deemed Residency, which provides the 183 day test.

• Residency is normally based on Common law principles, including the leading decision by the courts, Thomson V MNR [1946] SCR 209, 2 DTC 812

o Ordinary resident is defined in S 250(3) and the courts determined that one is “ordinary resident” in the place where in the settled routine of his life he regularly, normally or customarily lives.”

o Residency is then determined based on fact and intention:

Significant Residential Ties

Location of home/dwelling, spouse/common law partner and dependents

Secondary Residential Ties

Personal property, social ties, economic ties, driver’s licenses, work permits, landed immigrant status, seasonal dwellings, Canadian Passport, memberships

Other Residential Ties

Canadian mailing address, telephone listings, newspaper subscriptions, etc.

• Tax treaties are used to determine tie-breaker rules when determining residency. US-Canada tax treaty Article IV defines its interpretation of residency as:

o “any person that… is liable to tax therein by reason of that person’s domicile, residence, citizenship, place of management, place of incorporation”

o A resident of the US, is not a Canadian resident based on the substantial presence test, permanent home or habitual abode, and that individuals personal and economic relations are closer to the US than any third state.

• IRS – Form 6166 can be filed to request certification of residency

• CRA – Form NR73 can be filed and CRA will provide an opinion on your residency status.

Note 2

• There are 3 types of clearance certificates that can be filed.

o S 116 (2) for a proposed disposition – which should be filed 30 days in advance of the proposed disposition, to allow CRA time to process the clearance certificate

o S 116 (4) for an actual disposition – which needs to be filed within 10 days of the disposition date

o S 116 (5.2) for a actual or proposed disposition of real property that is other than capital ( ex. Inventory) with similar filing requirements as above.

Note 3

o If capital cost allowance (“CCA”) has been taken, but the amount is not certain, the required withholding will include the estimated recapture multiplied by the applicable federal tax rate (maximum CCA would indicate a 50% withholding)

Note 4

• S 116(5) – Liability of purchaser

o Purchase must make a reasonable inquiry as to the residency of the vendor, previously received the certificate or if tax treaty protected property, the purchaser must provide notice to the Minister with 30 days.

o Purchaser is liable to pay and remit 25% of the cost of the property acquired or any shortfall from the actual purchase price and the amount reported on the clearance certificate.

o There is no time limitation, and CRA can assess this at any time.

o If capital cost allowance (“CCA”) has been taken, but the amount is not certain, the required withholding will include the estimated recapture multiplied by the applicable federal tax rate (maximum CCA would indicate a 50% withholding)

• S 116(5.3) – Liability of purchaser in certain cases (real property that is “other than Capital Property)

o Purchaser may be liable to pay tax on behalf of the non-resident of 50% the purchase price, where a certificate of compliance was not issued, or where the amount by which the purchase price of the property exceeds the amount fixed in the certificate.

• Non-resident selling or gifting property to a non-arm’s length, the proceeds are deemed to be Fair Market Value and the purchaser acquires the property for fair market value.

Note 5

• If the disposition is subject to the rollover provisions of Section 85, then the election form (T2057) must be filed along with the request for a certificate of compliance (T2062)

• If the property is an exempt property or treaty exempted, then the Non-Resident can claim for a tax exemption under various tax treaties, providing the applicable provision of the tax treaty and supporting documentation (to indicate that tax was paid in country of residence), with the request for a clearance certificate T2062 form. A clearance certificate will be issued to indicate that the sale was treaty exempt.

• If the non-resident does not have a Business number, Social Insurance Number or Individual Tax Number, the request for a Business number or individual tax number must be filed with the request for a certificate of compliance.

• A certificate of compliance will be required if a Canadian resident is selling a property and becomes a non-resident before the property is disposed of.


Other Notes

• A vendor is not required to file a tax return if:

o The Vendor is a non-resident at the time of the disposition

o There is no Part I tax payable for the year.

o There are no amounts owing for taxes from prior years

o If a clearance certificate was issued and there is no additional taxes owing

• An income tax filing will otherwise be due, and any excess payment is refunded, or provision is made for the release of security once the amount owing has been satisfied.

o Income tax returns are due on April 30th for individuals, 90 days after the end of the trusts taxation year and 6 months after the fiscal year end for corporations.

• Possible exemption for Principal Residence for the time the non-resident was a resident of Canada and living in the home.

• Any amount of tax owing and discussed herein relates to federal tax owing, and relates to amounts owing and paid to the Canada Revenue Agency. Provincial taxes vary and may result in additional taxes, ie land transfer tax etc.

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