There have been a lot of stories of foreign citizens buying Canadian condominium units from floor plans and then reselling them, for a profit, as soon as the building is registered. These sellers must be aware that the Canadian taxman must be paid before they get their money. In some cases, the entire deal could be delayed until this gets done.
In general, you are a resident of Canada for tax purposes if you have lived here for at least 183 days in the past year. If you are a resident, and you sell any Canadian real estate, you do not have to pay any tax owing until you file your tax return at the end of the year.
For instance, if you are a resident and sold a property in July 2012, you would owe income tax, if any, by April 30, 2013 — the deadline for filing your 2012 income tax return.
However, if you are a non-resident, you must clear up your taxes before a real estate sale closes. This means applying to the Canada Revenue Agency (CRA) for something called a Certificate of Compliance. In general, you need to pay 25 per cent of the capital gain on your sale in order to get the certificate.
If the certificate is not received prior to closing, the buyer will insist on a holdback, typically 25 per cent of the entire purchase price, until the certificate is in fact produced. (In some cases the holdback amounts to 50 per cent of the purchase price.)
In more and more cases that I see in my practice, these certificates are not available for closing, owing to a backlog in processing the requests by the CRA. The reason the buyer insists on the certificate, or the holdback, is that if the seller sells without paying the required taxes, the tax burden then becomes the buyer’s responsibility.
Let’s look at an example: the non-resident buys a condominium for $300,000 in 2010 and wants to sell it now for $400,000. The gain is $100,000. The tax on the $100,000 must be paid before closing in order for the seller to receive the certificate. However, if the certificate is delayed, then the sum of $100,000, being 25 per cent of the total purchase price, will be held back on closing until the certificate is delivered.
If there is a mortgage on the property, this might require the seller to come up with his own money to pay off the balance of the mortgage before closing, since there may not be sufficient funds left after the holdback to do this.
Even if the property is sold at a loss, the seller must still obtain the certificate or else the same 25 per cent of the purchase price will be held back on closing.
The CRA may also delay the delivery of the certificate if the seller owes outstanding income tax for prior years, or if the seller has not, for example, paid the proper withholding taxes on any rental income he received from the property during his years of ownership.
How is all this tracked? In every real estate deal in Canada, the seller is required to provide a sworn declaration that, on closing, he will not be a non-resident of Canada. When such a declaration is made, the seller may receive the full purchase price from the buyer and he has until April 30 of the following year to pay the taxes. However, if the seller is not a resident, then the taxes must be paid early, as described above.
Real estate agents should explain this process immediately to clients selling a property in order to ensure that lawyers and accountants are aware in advance that tax filings must be made before any deal closes.
If you are buying from a non-resident, you should also ask questions to make sure that there is nothing that might delay your anticipated closing.
Foreign citizens might make a profit buying and selling Canadian real estate, but they will not escape Canadian taxes. In all cases, seek professional advice before signing any agreement to sell a property.
Mark Weisleder is a real estate lawyer. Contact Mark at firstname.lastname@example.org