Are you a non-resident individual of Canada selling Canadian property?
Are you the administrator, trustee, or executor (“representative”) of a Canadian estate or
trust making distributions to a non-resident?
Are you a representative for a foreign estate or trust selling Canadian property?
Before a non-resident can receive proceeds on the sale of real estate, the Canada Revenue Agency (“CRA”) wants to make sure that any income tax that would be owing on the sale is paid. Therefore, CRA requires that the purchaser withhold a portion of the gross proceeds.
The liability to comply with any potential non-resident withholding tax rests with the purchaser however, in practice the purchaser’s lawyer will engage the seller’s lawyer to hold in trust the non-resident withholding tax at the time of disposition. The only way to recover a portion of the withholding tax is to comply with the filing requirements detailed below.
Recent Draft Legislative Changes
In the 2024 federal budget tabled April 16th, the Canadian government announced changes to the capital gains inclusion rate. Notable changes affecting non-residents include:
- Increasing the capital gains inclusion rate from 1/2 to 2/3 of the capital gain realized on or after June 25, 2024. Individuals recognize the first $250,000 of capital gains annually at the old inclusion rate of 1/2. Certain trusts will also be eligible to include 50% of the gain on the first $250,000.
- Increasing the non-resident withholding tax required from 25% to 35% of gross proceeds on the sale of Taxable Canadian Property occurring on or after January 1, 2025.
- The tax payment required with Form T2062 will also increase from 25% to 35% of the net capital gain for dispositions occurring on or after January 1, 2025.
Please note that although the legislation has not yet been enacted as law, CRA’s view is that taxpayers should operate as if the new legislation will be enacted to avoid any unnecessary penalties. This means that starting January 1, 2025, the new withholding rates should be used unless news from the government is provided that they will not be proceeding with the proposed legislative changes.
Non-residents of Canada Selling Canadian Real Estate
- At time of sale: you will have 25% of gross proceeds withheld on the sale by your lawyer. This is the final tax if no Form T2062 is filed.
- This will increase to 35% under the proposed new legislation.
- By filing Form T2062, you reduce your tax payable to 25% of your capital gain on sale.
- This will increase to 35% under the new proposed legislation.
- If you have rented the property, you must also file Form T2062A after disposition in addition to filing non-resident rental returns annually. The non-resident withholding tax on sale of depreciable property (i.e. building used as a rental) is 50%.
- There is no change to the 50% withholding rate on rental buildings.
- Forms T2062 and T2062A are due within 10 days of the completion date of sale.
- Once CRA assesses the forms, the lawyer will make the reduced payment to CRA and release the remaining funds to the seller.
- Owners who are not a Canadian citizen or Canadian permanent resident must be compliant with Underused Housing Tax (“UHT”) regulations enacted in 2022 before CRA will issue a Certificate of Compliance. Visit the “news” section of our website to find more information on the UHT filing requirements.
- An income tax return is required to be filed to report the final taxable capital gain and claim any offsetting selling expenses. This could further reduce the tax owing on the transaction and enable the taxpayer to obtain a refund of any overpaid taxes.
Canadian Estate with Non-resident Beneficiaries
- A non-resident receiving Taxable Canadian Property in satisfaction of their capital interest in a trust is considered to have “disposed” of their interest and must file Form T2062 or Form T2062C depending on the combination of assets that the estate holds.
- If Form T2062 applies, the form is due within 10 days of the distribution date and the 35% tax must be withheld on the distribution until a Certificate of Compliance is issued from CRA.
- If Form T2062C applies, the form is due within 30 days from the date of distribution.
Example of Non-resident Disposition of Canadian Real Estate
Facts:
- Mr. Wilson purchased his principal residence in 2010 for $300,000 while resident of Canada.
- Mr. Wilson moved to the United States and ceased Canadian residency on December 31, 2020.
- The home remained vacant, never rented until Mr. Wilson agreed to sell the property, set to close on December 31, 2025 for $800,000.
- Mr. Wilson did not have other sources of Canadian income since becoming non-resident in 2020.
Steps:
1. On December 31, 2025, Mr. Wilson’s Canadian lawyer will withhold $280,000 as the required nonresident withholding tax amount, representing 35% of the gross sales price (25% or $200,000 if the proposed capital gains changes are not passed).
2. Form T2062 is required to be filed by January 10, 2026 (within 10 days of the completion date) requesting Mr. Wilson make a tax payment based on 35% of his capital gain after the eligible principal residence exemption.
3. Mr. Wilson’s capital gain would be calculated as:
- a. Net capital gain before principal residence exemption- $500,000 ($800,000 sale price less $300,000 purchase price).
- b. Mr. Wilson can exempt 75% of his capital gain or $375,000 calculated as:
- i. years Mr. Wilson resided in the property from 2010 to 2020, 11 years.
- ii. +1 eligible bonus year when property is purchased as a Canadian resident.
- iii. divided by years Mr. Wilson owned the property from 2010 to 2025, 16 years.
- iv. Shown as (11+1)/16 x $500,000.
- c. Mr. Wilson’s capital gain after his principal residence election is $125,000 ($500,00 capital gain – exemption of $375,000).
- d. To obtain the exemption of $375,000, Form T2091 Designation of a Property as a Principal Residence by an Individual (Other than a Personal Trust) must be filed with Form T2062.
4. After filing Form T2062 with Form T2091, CRA should agree to the calculations and issue a request for tax payment of $43,750 (35% x net capital gain of $125,000).
5. CRA process times for these filings can vary from three months to nine months.
6. Mr. Wilson’s lawyer will make a cheque payable to Receiver General for $43,750 out of the nonresident withholding amount of $280,000 held in trust with the lawyer.
7. Once CRA posts the cheque for $43,750, they will issue Form T2068 Certificate of Compliance summarizing the sales price, cost basis, exemption amount, and tax paid.
8. Once the lawyer receives Form T2068 Certificate of Compliance, the remaining tax withholding of $236,250 ($280,000 less $43,750) can be released to Mr. Wilson.
9. Mr. Wilson would still be required to file a 2025 Canadian income tax return referred to as a Section 115 tax return to report the disposition of the property. The tax return would be due April 30, 2026.
- a. The Form T2091 to claim the principal residence exemption must once again be filed with the Section 115 tax return.
Penalties for Late-Filing
- CRA can assess penalties equal to $25 per day that Forms T2062, T2062A, or T2062C are past due, up to $2,500.
- If the Certificate of Compliance is not obtained, the purchaser must remit the 25% withholding of gross proceeds (35% withholding for sales after 2024) to CRA within 30 days after the month the property sold. Failure to remit the withholding tax can result in a 10% penalty of the required withholding. As mentioned above, this in practice is handled by the seller’s lawyer.
Given the potential increase to the required withholding tax, the tax savings offered by filing these forms and the penalties for non-compliance, it’s essential to file the correct form(s) on a timely basis.
For assistance in filing these forms, including applicable tax returns, please contact one of our professionals at Cameron Izard Snell LLP. Our cross-border tax group is also able to advise on both Canadian and US tax issues you may have in the process.
This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for personal advice. Before taking any particular course of action, contact Cameron Izard Snell LLP or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility
for any loss or damage occasioned by your reliance on information contained in this publication.