In addition to all the usual taxes residents have to bear owning real estate; all non-residents selling or buying Canadian real estate are required to undergo some additional tax burdens made to deter non-resident investors from speculating in the housing market and ensure governments collect their due taxes. Without proper guidance, it can be a long and complex process and can result in significant penalties.
Different taxes may apply to purchase, ownership or sale of real estate:
- Municipal property taxes
- Foreign buyer’s tax (NRST)
- Capital gains tax
- Land transfer taxes
- Non-resident seller’s tax
Owners pay municipal property taxes during ownership. The seller of an investment property typically pays capital gains tax on the profit amount upon selling, not on the full sale price. Sellers of a principal residence may be exempt from capital gains tax.
Taxes could also apply to profits made during an assignment sale, flipping a property after a renovation if it’s not a principal residence and it’s considered business income, when buying vacant land to build and sell the property afterwards, or when selling a rental income property.
Summary of the Canada Revenue Agency (CRA) rules for property owned by non-residents
If the seller is a non-resident of Canada for tax purposes, they must inform the CRA about the sale or proposed sale and pay taxes owed.
If the property is already sold, this notification must be within ten (10) days of the date of sale. The seller must complete the application and notification forms and send them to the CRA along with the payment or security for the tax amount payable.
Non-resident sellers must send the applicable notification forms to the Center of Expertise (CoE) for the appropriate region based on the properties legal or municipal address.
The CRA issues a Certificate of Compliance (Form T2064 or Form T2068) once requirements are met.
Non-resident seller’s withholding tax
If you are looking to sell your house, condo, or any other property, you are subject to Canadian non-resident withholding tax.
Canada has the right under its tax laws, and under most Income Tax Treaties with other countries, to tax the sale of your Canadian real estate. Because you are not a resident in Canada, the Canada Revenue Agency (“CRA”) wants to ensure it at all times has sufficient “security” from you to cover your taxes owing, in case you decide to not comply with the required tax filings. To do so, the CRA requires the purchaser to withhold 25% (or 50% in some cases) of the sale price. Though this is not the final tax owing.
Through the process of applying for a “Certificate of Compliance,” the CRA will request a withholding tax payment of 25% of the NET capital gain instead of 25% of the sales price. This is still not the final tax owing. By filing a Canadian T1 tax return reporting the net gain, you will be entitled to a significant refund of the amount of taxes withheld by the CRA, since on this filing you can claim our selling outlays, as well pay tax at Canada’s marginal tax rates, which is typically well under the 25% tax withheld. In effect, the process forces you to comply with your tax obligations; otherwise, you’ll be donating a significant sum to the Canadian government.
What is the process of selling a property?
Step 1 – Purchaser is required to withhold 25% (or 50% in some cases) of the total purchase price.
Step 2 – Seller must let the CRA know about the sale or proposed sale by filing for a Certificate of Compliance, completing the applicable form (T2062 or T2062A). These are due no later than 10 days after the actual sale. The penalty for late filing is $25 per day to a maximum of $2,500, even if no taxes are owing. This is in addition to any tax owed by the seller on the sale of the property. If the property is jointly held, then multiple penalties will apply to the property taxes.
Step 3 – The CRA will request payment or acceptable security to cover the resulting taxes payable and issue a Certificate of Compliance. Our experience is the CRA is currently taking about 4 months to process the forms and issue Certificate of Compliance, though this timeline can vary by Province.
Step 4 – Upon receipt of a copy of the Certificate of Compliance, the purchaser can release the amounts withheld from Step 1 to the non-resident.
Step 5 – After the end of the calendar year, the non-resident is required to file a Canadian tax return to report the sale.
Note: If the purchaser does not receive the Certificate of Compliance or a “comfort letter” from the CRA, they are required to remit the amount withheld from Step 1 to the CRA within 30 days after the end of the month in which the property was purchased. Failure to remit the withholdings to the CRA by the due date may result in a penalty to the PURCHASER equal to 10% or 20% of the amount that was required to be remitted.
Selling process example:
Assume the seller sold a Canadian real property for $400,000 and originally paid $75,000 15 years ago.
Step 1 – Purchaser will withhold $100,000 [$400,000 x 25%]. Typically, this is held in trust by the seller’s lawyer.
Step 2 – Seller files for Certificate of Compliance.
Step 3 – The CRA will request payment or acceptable security of $81,250 [($400,000 – $75,000) x 25%]. Seller’s lawyer remits the $81,250 out of the $100,000 originally withheld to the CRA. CRA issues Certificate of Compliance.
Step 4 – Upon receipt of a copy of the Certificate of Compliance, the seller’s lawyer can release the remaining funds held in trust of $18,750 [$100,000 – 81,250].
Step 5 – After the end of the calendar year, upon the filing of the non-resident tax return, the actual tax liability is approximately $55,000. The non-resident receives a refund of $26,250 [$81,250 – 55,000].
What actions is your REALTOR® going to take in the trade
- Review the Agreement and Purchase and Sale’s residency provisions or use a separate declaration of residency
- Communicate any concerns to the seller / their salesperson
- Document all efforts and responses
- Urge the Buyer to consult with a lawyer or tax accountant
- Discuss the possibility of a 25% holdback clause
What actions others can take in the trade
- Urge clients to speak to a lawyer or tax accountant
- The lawyer should do additional research
- The lawyer can review the APS and suggest a holdback of 25%
- The lawyer could request a solemn declaration or documentation
20% Non-resident speculation tax (NRST) for foreign buyers in the province of Ontario
The Government of Ontario has announced amendments to the Non-Resident Speculation Tax (NRST).
As of March 30, 2022, the NRST rate will be increased from 15% to 20% and will be expanded to all regions of the province. The NRST applies to the transfer of “designed land”, which is considered land that contains at least one and no more than six single family residences.
The NRST will continue to apply to individuals who are not Canadian citizens or permanent residents of Canada or by foreign corporations or taxable trustees.
The NRST applies in addition to the general Land Transfer Tax (LTT) in Ontario.
Note: The NRST applies if any one of the transferees is a foreign entity or taxable trustee, regardless of their share of ownership. For example, if a transfer of residential property is made to four transferees, only one of which is a foreign entity, the NRST would apply to 100 per cent of the value of the property.
Certain individuals will continue to be exempt from the NRST, including foreign nationals in the Ontario Immigrant Nominee Program, protected persons (refugees), spouses of Canadian citizens, or permanent residents of Canada.
Increasing the tax rate to 20% and expanding the tax to apply provincewide is an attempt by the Government of Ontario to deter non-resident investors from speculating in the housing market in hopes that home ownership will become more attainable for Ontario residents.
Entities subject to the NRST
The NRST applies to foreign entities or taxable trustees who purchase or acquire residential property in the province of Ontario.
A foreign entity is either a foreign corporation or a foreign national.
A foreign corporation is a corporation that is one of the following:
- A corporation that is not incorporated in Canada.
- A corporation the shares of which are not listed on a stock exchange in Canada, that is incorporated in Canada and is controlled, directly or indirectly in any manner whatever, within the meaning of section 256 of the Income Tax Act (Canada), by one or more of the following:
- a foreign national
- a corporation that is not incorporated in Canada
- a corporation that would, if each share of the corporation’s capital stock that is owned by a foreign national or by a corporation described in paragraph 1 were owned by a particular person, be controlled, directly or indirectly in any manner whatsoever, within the meaning of section 256 of the Income Tax Act (Canada), by the particular person.
A foreign national, as defined in the Immigration and Refugee Protection Act (Canada), is an individual who is not a Canadian citizen or permanent resident of Canada.
A permanent resident means a person who has acquired permanent resident status and has not subsequently lost that status under section 46 of the Immigration and Refugee Protection Act (Canada).
A taxable trustee means a trustee of:
- a trust with at least one trustee that is a foreign entity, or
- a trust with no foreign entity trustees if a beneficiary of the trust is a foreign entity.
Taxable trustee does not include a trustee acting for the following types of trusts:
- A mutual fund trust within the meaning of subsection 132 (6) of the Income Tax Act (Canada).
- A real estate investment trust as defined in subsection 122.1 (1) of the Income Tax Act (Canada).
- A SIFT trust as defined in subsection 122.1 (1) of the Income Tax Act (Canada).
Types of property subject to the NRST
The NRST applies to the transfer of land which contains at least one and not more than six single family residences. Examples of land containing one single family residence include land containing a detached house, a semi‑detached house, a townhouse or a condominium unit. In a situation involving the purchase of multiple condominium units, each unit would be considered land containing one single family residence. Examples of land containing more than one single family residence that are subject to the tax include land containing duplexes, triplexes, fourplexes, fiveplexes and sixplexes.
The NRST does not apply to other types of land such as land containing multi‑residential rental apartment buildings with more than six units, agricultural land, commercial land or industrial land.
The NRST applies on the value of the consideration for the residential property. If the land transferred includes both residential property and another type of property, the NRST applies on the portion of the value of the consideration attributable to the residential property. For example, if the purchase price of the transaction is $1,000,000 and contains one single family residence with a value of the consideration of $400,000, and commercial land with a value of the consideration of $600,000, the 20 per cent NRST would apply to only the $400,000 portion.
The 20 per cent NRST applies to the value of the consideration for a transfer of residential property if any one of the transferees is a foreign entity or taxable trustee.
For example, if a transfer of residential property is made to four transferees, one of whom is a foreign entity that acquires a 25 per cent share in the land, the NRST would apply to 100 per cent of the value of the consideration for the transfer.
Each transferee is jointly and severally liable for any NRST payable. If a foreign entity or taxable trustee does not pay the NRST, the other transferees will be required to pay the tax. This applies even if the other transferees are Canadian citizens or permanent residents of Canada.
The NRST does not apply when a person purchases or acquires residential property as a trustee of a mutual fund trust, real estate investment trust or specified investment flow‑through trust.
The NRST applies to unregistered dispositions of a beneficial interest in residential property. This includes purchases and acquisitions of residential property where section 3 of the Land Transfer Tax Act is applicable.
What does this mean for Ontario REALTORS® and their clients?
If an agreement of purchase and sale was entered into for the conveyance of land located outside the Greater Golden Horseshoe (GGH) (or the assignment of such an agreement) on or before March 29th, 2022, there is no NRST payable.
As of March 30th, 2022 the NRST is applicable province wide.
The tax applies to all transfers of residential property that contains at least one and not more than six single family residences. This includes detached homes, semi-detached, triplexes, duplexes, townhouses and condominium units. It does not matter whether a single family actually resides there nor whether the property is rented or occupied by the owner; it remains taxable so long as it was designed for a occupancy as the residence of a family.
The NRST does not apply to other types of land such as land containing multi residential rental apartment buildings with more than six units, agricultural land, commercial land or industrial land.