January 27, 2025
Highlights: • Withholding taxes are amounts deducted by the buyer from the property sale price to ensure the seller or landlord fulfils their tax obligations to the government. • Withholding taxes owed by non-resident sellers will rise from 25% to 35% in 2025. • Non-residents earning rental income from Canadian real estate are taxed at 25%. • Canadian buyers are liable for withholding taxes on property purchases from non-residents. • Non-resident sellers can reduce withholding taxes and streamline property transactions by applying early for a CRA-issued compliance certificate. |
Despite the volatile nature of Toronto’s real estate market, it has remained an attractive hotspot for foreign real estate investment, offering investors opportunities for substantial returns. However, as a non-resident, it can be quite difficult to navigate the complexities of Canadian tax laws. Understanding these laws is essential to avoid penalties, ensure compliance, and maximize your investment returns. This article will provide you with key insights on tax implications applicable to non-residents looking to engage in real estate transactions. It will be outlining your obligations, informing you of the new changes in legislation for 2025, and guiding you through practical steps to navigate the real estate market effectively.
When non-residents sell their real estate properties, compliance with Section 116 of the Income Tax Act is crucial. This section ensures that Canada collects taxes on any capital gains arising from property sales. It is important to be aware that starting January 1, 2025, there is an increased withholding rate of 35%. Additionally, the tax for the capital gains of non-residents has risen from 50% to 66% as of June 2024.
How the Process Works:
1. The buyer is required to withhold 35% of the gross sale price (50% if the property is depreciable) and submit it to the CRA unless the seller provides a Clearance Certificate.
2. Clearance Certificate Application: To avoid losing 35% of the sale price, non residents sellers must apply for a Clearance Certificate. This involves notifying the
CRA of the sale, paying the estimated taxes on the capital gain, and submitting the required documentation, including:
The clearance certificate application must be submitted within 10 days of the sale’s closing date. Delays in submission can lead to penalties and interest, so it is important to prepare proactively!
Katie is a non-resident who purchased a property in Canada for $550,000 and sells it for $650,000. Her capital gain is $100,000. Under Canadian tax law, she is taxable on 50% of the gain, which would be $50,000. If she did not obtain a Clearance Certificate, the buyer must withhold 35% of the $650,000 sale price, a significant $227,500. If she had a clearance certificate, she would only have to pay the tax on her capital gain. This example demonstrates that it would be more profitable for non-resident sellers to obtain the clearance certificate.
As a non-resident property owner in Canada, you are required to pay taxes on any rental income earned from your property. The Canada Revenue Agency (CRA) mandates a withholding tax of 25% on gross rental income, which must be remitted by either the tenant or property manager to the CRA.
If this tax is withheld on gross income, the burden can be significant. However, you can alternately file a Section 216 income tax return, allowing you to pay taxes on net rental income. This would be after deducting allowable expenses such as property management fees, maintenance, and mortgage interest. This option usually results in lower tax liability. If you are choosing this alternative, it requires timely filing and accurate record-keeping. To avoid penalties and interest, the section 216 tax return must be filed within six months of the tax year.
It is important to notice that Section 116 shifts the burden of collecting taxes onto the buyer if the seller is a non-resident. Failing to withhold the required tax can result in the buyer being personally liable for the amount owed to CRA. The significant burden carried by the buyer emphasizes the importance of verifying the residency status of the seller. This is why it is important for buyers to consult a reliable real estate lawyer for any property transaction.
In this case, a buyer in BC was assessed $600,000 in taxes because the seller was a non resident, and the required withholding tax was not remitted to CRA by the buyer. The buyer was completely unaware that the seller was a non-resident. This was because the buyer’s lawyer had failed to conduct su9icient investigation into the seller’s residency.
Tenants renting from non-resident landlords are also subject to withholding tax obligations under Section 215 of the Income Tax Act. A 25% withholding tax must be deducted from rent payments and remitted to the CRA. However, the CRA has clarified that it does not intend to collect unpaid taxes from individual tenants in most cases, as highlighted in a 2024 statement by the Minister of National Revenue.
The withholding tax obligation also applies to the sale of a purchaser’s rights under an Agreement of Purchase and Sale. When a non-resident assigns their right to purchase a property for a profit, the buyer must withhold taxes on the purchase price of that right. This rule ensures that capital gains on such real estate transactions are subject to Canadian taxation.
For example:
A non-resident purchases the right to buy a condo unit for $350,000 and later sells this right for $450,000, earning a $100,000 profit. The new buyer must withhold tax on the $135,000 they pay (including the $100,000 profit and the $35,000 deposit).
When you fail to comply with Section 116 requirements, it can lead to significant penalties, interest charges, and delays in accessing sale proceeds. Non-residents should prioritize compliance to avoid these outcomes.
With the increased rate of withholding taxes and increased taxes on capital gain, the financial stakes faced by non-resident sellers is significantly higher in 2025. This makes it necessary for non-resident sellers to take proactive measures including:
The safest measure for buyers to take to protect themselves is to engage a reliable and experienced real estate lawyer to help with any real estate transaction. This is our area of expertise, and we would be happy to assist you!
A real estate lawyer will help buyers confirm the seller’s residency status or obtain a clearance certificate. By obtaining a clearance certificate, the lawyer ensures that there are no outstanding tax liabilities or liens on the property, safeguarding the buyer from future financial obligations.
Engaging a real estate lawyer will also greatly benefit non-resident sellers. They will be able to accurately determine tax liabilities and guide you to complete a punctual and compliant filing of all required documentation. Real estate lawyers will also be able to provide you with legal advice and strategies to minimize tax burdens and maximize returns.
Owning Canadian real estate property as a non-resident o9ers significant investment opportunities but it comes with serious tax obligations. As a non-resident landlord, seller, or assignor, it is important to be aware of obligations implicated by the laws surrounding rental income tax and withholding tax on property sales. As a Canadian buyer, it is important to be aware of the burden on the buyer to ensure the collection of taxes. It is crucial for you to understand and comply with these regulations. With the new changes in the law in 2025 such as the increased withholding tax rate, the stakes are higher than ever. By consulting our experienced real estate lawyers at Bradshaw & Mancherjee, you can be vigilant of these challenges and navigate them to achieve your real estate investment goals.
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