Real Estate Law: Non-resident Vendor

There are certain legal and accounting issues that arise when a non-resident of Canada sells property in Canada. These issues are set out below.

There are no restrictions for a non-resident purchase, nor are there tax implications or extra fees payable. A non-resident may purchase as many properties as they wish. Tax issues may arise on the holding of property by non-residents. Non-residents of Canada are subject to tax on various kinds of income paid to them, including rental income. If you are a non-resident and are renting property in Canada, a tax return must be filed each year.

The Income Tax Act (ITA) of Canada provides that whenever a non-resident disposes of property, the non-resident is required to pay the appropriate amount of taxes on any gain. In order to satisfy the purchaser that the appropriate amount of taxes are being paid, the vendor must provide to the purchaser, on or before closing, a clearance certificate from Revenue Canada. This certificate is issued by the federal government and certifies that a certain amount of money is payable for the taxes. The amount owning is deducted from the sale proceeds and sent directly to the federal government by the vendor's lawyer.

The clearance certificate is issued pursuant to Section 116 of the ITA and is usually required on the closing date. It may be applied in advance of the closing by the vendor, but not until there has been a contract of purchase and sale entered into by the vendor, with all subjects being removed. The wait for the clearance certificate is usually around 6-8 weeks, so in a perfect world, there would be enough time in a 6-8 week lead-time between when the subjects are removed and the completion date.

If the certificate is not obtained prior to the closing date, the purchaser is required to holdback from the sale proceeds a percentage of the selling price. This percentage is either 25% or 50% depending on whether the property is non-depreciable property (a residence of the vendor) or depreciable property (the property has been rented). The transaction closes with the money remaining in a lawyer's trust account until the certificate is obtained. Once the certificate is obtained, the taxes are paid from the holdback and the vendor receives any left over.

Please note that the holdback is based on the selling price, not the equity in the property. If there is financing on the property, the vendor may need to pay this financing from other sources.

The courts have held that an individual is "ordinarily resident" in Canada for tax purposes if Canada is the place where the individual, in the settled routine of his or her life, regularly, normally or customarily lives. In making a determination of residence status, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intention and continuity with respect to stays in Canada and abroad.

COMMENT: Please be advised that the ITA frequently changes and that there are often new cases dealing with the issues set out above.