Like many countries. Canada taxes non-residents who realize gains on real estate located within its borders[1].
This will be true whether the real estate is capital property that is held for the purposes of earning from rental or a business; capital property held for personal use; or inventory of a business (e.g. where it is held for resale).
This article will focus on situations where the real estate is capital property.
The Income Tax Act (“the Act”) provides that non-residents are subject to tax in Canada on taxable gains from the “disposition” (which can include sales, as well as other events deemed to be dispositions, such as death) of “taxable Canadian property” (“TCP”)[2]. TCP includes real estate within Canada[3], as well as options or interests therein[4].
In addition, if a non-resident is carrying on business in Canada, Canada can tax the profits resulting from such business[5]. That would cover profits from selling real estate that is inventory of a business.
All of Canada’s tax treaties permit Canada to tax gains on direct interests in Canadian real estate that are owned by non-residents[6].
Under the Act, 50% of capital gains are included in income that is subject to tax, and taxed at the appropriate rate. In the case of a natural person, graduated tax rates apply, similar to those that apply to Canadian resident. Generally, only federal, not provincial, taxes apply, and special additional federal tax applies in lieu of any federal tax[7]. Business profits would be fully taxable.
A non-resident disposing of Canadian real estate will be subject to notification and clearance requirements under subsection 116 of the Act. If no tax clearance is required, the purchaser is required to withhold and remit 25% of the purchase price on account of tax, and remit it to the Canada Revenue Agency (“CRA”)[8]. To obtain a clearance, the non-resident must generally deposit with the CRA, or post security for, 25% of the excess of the sale price over the cost base[9].
Whether a tax clearance is obtained or not, the non-resident will be required to file a Canadian tax return (T1 for natural persons) reporting any gain. If there is excess tax that has been deposited with the CRA (which is usually the case), a refund can be obtained after filing the return.
[1] The U.S. taxes non-resident aliens under its FIRPTA regime in section 897 of the IRC
[2] Paragraph 2(3)(c) of the Act.
[3] Paragraph “(a)” of the TCP definition in subsection 248(1) of the Act.
[4] Paragraph “(f)”, Supra
[5] Paragraph 2(3)(b) of the Act.
[6] For example, Article XIII(3)(b)(i) of Canada’s treaty with the U.S.; note, however, that under Article XIII(9), in certain cases, gains accrued prior to 1984 may be exempt.
[7] Different rules apply to real estate located in Quebec
[8] To the extent that the real estate includes depreciable property or inventory, the purchaser is actually required to remit 50% of the purchase price
[9] Generally, form T2062 is used for this purpose. Disposition costs, such as legal fees and sales commission may not be deducted at this stage, but can be deducted when the return is filed.
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