✦ A withholding tax in real estate transactions arises when a non-resident of Canada sells property located in Canada.
✦ A non-resident seller is obliged to notify the Canada Revenue Agency (CRA) about the upcoming transaction and to pay taxes before or immediately after the deal is closed.
✦ This 4-step process is explained in details in an information circular (IC72-17R6) issued by the CRA and named “Procedures concerning the disposition of taxable Canadian property by non-residents of Canada – Section 116”.
✦ Why is it important to start this process immediately after a non-resident seller has decided to sell a property?
✦ It will ease the seller’s life. If the process is completed before the closing date, (i.e. the notice in the prescribed form submitted to CRA) the taxes calculated in this notice are paid and the certificate of compliance is obtained, the seller will obtain the full amount of the sale proceeds on the closing date.
✦ If by the closing date, nothing is done, the purchaser is entitled to withhold 25% of the purchase price and has the right to remit the whole amount to CRA after 30 days from the end of the month in which the property was acquired.
✦ It’s worth to mention that when a non-resident seller complies with the law requirement to submit the notice to CRA within the prescribed time, the seller will have to pay 25% of withholding tax calculated as the difference between the purchase and the sale price, but in case the seller does not comply with the law requirement, the law allows the purchaser to withhold and remit to CRA 25% of the purchase price which is much higher than the first-mentioned amount.
✦ For example, if the non-resident seller bought the house for $100,000.00 and sold the house for $150,000.00, the seller will need to fill in the Notice and pay 25% of the difference between $150,000.00 and $100,000.00 which is $12,500.00. The amounts might be lower depending on the personal situation of the seller. An experienced accountant is a great value in this case.
✦ In case the seller does not comply with the law and does not submit the Notice within the prescribed time, the purchaser may withhold 25% of the purchase price (using the example up there, that would be $37,500 of the price that the house was sold for, which was $150,000.00)
✦ In practice, the purchaser’s lawyer withholding the amount equal to 25% of the purchase price is quite rare. Normally, the seller submits the Notice to CRA before the closing date or within 10 days after the closing date as it’s prescribed by law. The seller’s lawyer keeps in trust the amount equal to 25% of the purchase price. The Seller’s lawyer makes the required tax payments to CRA for the Seller and releases the balance to the Seller upon the receipt of the certificate of compliance from CRA.
✦ As I mentioned above, an experienced accountant is necessary for the successful completion of the task. The accountant properly calculates the amounts required for the Notice and successfully communicates with CRA should any questions arise.
✦ Do you have questions about the real estate closings? Book a consultation with Anna Gurevich Law Office or call us (289)848-0096