Author: Warren Gilmore – Law Student
Edited By: Ryan Carson
If purchasing a property in Ontario from a Non-Resident, the transaction will involve a unique set of tax concerns. It is important to have an understanding of your obligations, and to have them provided for in the Agreement of Purchase and Sale in order to avoid personal tax liability.
When a Non-Resident owner of property in Canada decides to sell, the CRA determines any yield in the value of the home that will be considered capital gains. As such, the CRA requires the Non-Resident Vendor to pay taxes on these gains. It is the responsibility of the Purchaser to perform a reasonable amount of due diligence to determine the residency classification of the Vendor. In conducting this due diligence, the Purchaser can request that the Vendor execute an “Affidavit of Residency.”
For the protection of the Purchaser, Agreements that involve these Non-Resident concerns usually include a clause that reads something to the effect of:
“The Purchaser is advised that the Vendors are Non-Residents of Canada and the Vendor's lawyer shall retain 25% of the purchase price in Trust until appropriate clearance certificates are issued by Revenue Canada. The vendor agrees to provide undertaking of such on closing.”
The Non-Resident Vendor is required to secure a clearance certificate from CRA before obtaining the entirety of the sale proceeds. This clearance certificate will outline how much of the sale proceeds are taxable, and are owed to CRA. While the clearance certificate cannot be applied for until all conditions have been fulfilled and the Agreement becomes binding, it is ideal to have this certificate in possession prior to the closing date of the transaction. This will allow all parties in advance to know exactly what taxes are owed, eliminating the need for a holdback. If this condition is not provided for and a clearance certificate is not obtained, the Purchaser will become the obligated party, and will be responsible for any taxes that CRA determines to be applicable to the transaction.
If a clearance certificate is not obtained before the closing date, the Purchaser and their lawyer should take the necessary steps to have the allotted portion of the sale proceeds remain in trust with the Vendor’s lawyer, pending a complete tax assessment from CRA.
The amount of the purchase price to be withheld is solely dependent on the nature of the subject property. If the subject property is determined to be non-capital, meaning that is was never used to produce income, and instead involved family residential use, then Section 116 of the Income Tax Act, provides that 25% of the purchase price is to be withheld. Alternatively, if the subject property is considered to be capital, and was used to produce income, the holdback allotment can increase to as much as 50% of the purchase price.
If this assessment reveals that no taxes are owed on the property, CRA will issue a clearance certificate, which permits the release of the sale proceeds that were being withheld. Conversely, if the CRA assessment revels that the transaction is indeed subject to taxes, then the amount owing will be deducted from the holdback amount. In total, this assessment period can take anywhere from 1-3 months to conclude.
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