A Buyer purchasing Canadian real estate from a non-resident Seller has an obligation to obtain from the Seller a Certificate of Compliance (also known as a “Tax Clearance Certificate”) or withhold a holdback from the gross sale proceeds if no Compliance Certificate is issued at the time of closing. Make a note; that the holdback is 25% of the gross purchase price not the net sale proceeds, no deductions allowed. Typically the holdback is 25% of the gross purchase price but this liability may increase to 50% where the real estate is depreciable property (a building used for rental or business purposes) or where the real estate was not held by the non-resident as capital property (for example, held for speculative purposes). Note that the trigger for the Tax Compliance Certificate and holdback is based on where the Seller “permanently resides” not whether the Seller is a Canadian citizen or not. The Seller can be Canadian citizen and still be a non-resident. Watch for this. A Buyer who fails to obtain the Tax Compliance Certificate or withhold the required tax may liable for it unless they had no reason to believe the Seller was a non-resident.
What can a Seller do?
The withholding tax requirements can be reduced or eliminated if the Seller obtains a Certificate of Compliance from CRA prior to closing. However it could take CRA up to 8-12 weeks or longer to issue a Certificate of Compliance, and as a result the CRA is not usually able to issue a certificate before the actual closing date. It is common practice for the Buyer’s Notary or Lawyer to arrange, through an undertaking with the Seller’s Notary or Lawyer, a hold back amount equal to 25% or 50% of the gross selling price of the property. The Notary or Lawyer withholds the amount in trust on behalf of CRA and notification is given to CRA requesting them to issue a comfort letter. CRA will only issue a Comfort Letter if the Seller has submitted an application to their office for the Tax Compliance Certificate. The Comfort Letter authorizes the Notary or Lawyer to retain the withheld funds beyond the statutory remittance date without incurring any interest or penalties. It is up to the Seller to obtain the Comfort Letter from CRA and provide a copy to the Buyer’s Notary or Lawyer within the required time frames.
As mentioned above a Non-resident is a Seller who does not permanently reside in Canada. Non-residency does not mean the Canadian Citizenship of the Seller. You can be a Canadian Citizen and still be a non-resident. The Income Tax Act obliges the Buyer of real estate to make a reasonable inquiry to figure out if the Seller is a non-resident of Canada. The Buyer will be relieved from their obligations to pay the non-resident’s tax only if, on reasonable inquiry, and the Buyer has no reason to think that the person is a non-resident.
However the term “resident” is not defined in the Income Tax Act. Whether or not a person is a resident of Canada is determined by many factors. The amount of time spent in Canada is not the only factor considered. Other factors include whether the Seller is maintaining a residence in Canada; relatives in Canada; bank accounts in Canada and other social and economic ties. If the Buyer knows or suspect that a Seller may be a non-resident, they should advise their Notary or Lawyer as soon as this comes to light to ensure that all Canada Revenue Agency’s requirements are met.
Sellers have lots of issues being a non-resident.
Time: Certificates of Compliance can take a number of weeks to obtain from the CRA after submission of all required documentation. It’s the rare Seller who has that amount of time between his/her sale going unconditional and the completion date.
Payouts: if the Seller is a non-resident on a $500,000 sale where the withholding tax is 25% of the gross sale proceeds, that means $125,000 is being held back by the Buyer! If the Seller has a $400,000 mortgage to payout then, on closing, the Seller can’t payout his/her mortgage and the transaction cannot close unless the Seller can provide additional funds so that there is sufficient funds for the required holdback.
Need for Sale Proceeds: many Sellers purchase a new property based on receiving full sale proceeds. Buyer’s withholding tax could jeopardize that new purchase