The Income Tax Act 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 Buyer that the appropriate amount of taxes are paid, the Seller 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 owing is deducted from the sale proceeds and sent directly to the federal government by the Seller’s lawyer.
The clearance certificate is issued pursuant to section 116 of the Income Tax Act and is usually required on the closing date. The application for the certificate may be made prior to closing by the Seller, but not until there has been a subject free contract of purchase and sale. The wait for the clearance certificate is usually around 3 months, so in a perfect world, there would be a 3-month lead-time between subject removal and the completion date.
Complications can arise if the certificate is not obtained prior to the closing date. In such a case, the Buyer is required to hold back from the sale proceeds a percentage of the selling price. This percentage is between 25% and 50%, depending on whether the property is non-depreciable property (a residence of the Seller), depreciable property (the property has been rented), or inventory (Seller is a builder). 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 Seller receives any amount left over.
Note that the holdback is based on the selling price, not the equity in the property. If there is financing on the property, the Seller may need to pay this financing from other sources.
Spagnuolo & Company LLP is able to assist non-residents apply for their clearance certificate, eliminating the need for the client to retain both a law firm and an accounting firm.
There are no income tax issues that arise from a non-resident purchase of the property. There are no restrictions for a non-resident purchase, nor are there income tax implications. A non-resident may purchase as many properties as they wish.
Income 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.
Although there are no income tax issues, there is the Foreign Buyers Property Transfer Tax. This is a tax of 20% of the Purchase Price, and must be paid by anyone who is not a Canadian citizen or a Permanent Resident, or registered under the Provincial Nominee Program. This applies to any property within:
• Greater Vancouver Regional District
• Capital Regional District
• Fraser Valley Regional District
• Regional District of Central Okanagan
• Regional District of Nanaimo
For further information on the Foreign Buyers Tax, please visit the B.C. government page at:
For the FBPTT it is clear that the tax applies to a person who is not a Canadian citizen, Permanent Resident or registered under the Provincial Nominee Program.
A different definition applies for income tax, as the term “resident” is not defined in the Income Tax Act. The courts have held “residence” to be a “matter of the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.” 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.
Please remember that the Income Tax Act frequently changes, and there are often new cases dealing with the issues set out above. While we try to keep our website as current as possible, please do not rely on the above without talking to one of our lawyers.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a lawyer for individual advice regarding your own situation.