A non-resident of Canada is subject to Canadian income tax on certain types of income from Canadian sources, including
- income/loss from employment in Canada,
- income/loss from a business carried on in Canada, and
- capital gains/losses from dispositions of taxable Canadian property
A non-resident of Canada is required to file a special income tax return (Income Tax and Benefit Return for Non-Residents and Deemed Residents of Canada) to report the above sources of income. A non-resident who doesn’t have a social insurance number is required to obtain an individual tax number (ITN). The ITN can be obtained by completing Form T1261, “Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents.” Although certain deductions and tax credits are allowed, there are some restrictions.
Non-residents of Canada are not required to file a Canadian tax return if their only income from Canada is from certain types of passive income, such as dividends, and pension income. In such cases, tax is withheld at source by the payer when the amount is paid to the non-resident. The general rate of withholding tax is 25%, but this may be reduced to a lower rate pursuant to the tax treaty that Canada has with the non-resident’s country. In the vast majority of cases, the non-resident may be able to claim a foreign tax credit in their country of residence for Canadian taxes paid. Rental income earned by a non-resident is also subject to the 25% withholding tax (on the gross rents received). However, in the case of real property rentals, there is the option for the non-resident to file a special return under Section 216 whereby tax is paid on the net income earned from the property. There are also additional procedures and filings that can be undertaken to reduce the amount of tax withheld to that based on estimated net income.
Non-residents are also generally exempt from filing Canadian income tax returns if the following criteria are satisfied:
- No tax is payable by the non-resident for the current taxation year
- Each taxable Canadian property disposed of in the year is either exempt from Canadian tax due to a tax treaty or a property for which the CRA has issued a clearance certificate to the non-resident
As noted above, a non-resident of Canada is liable to pay Canadian income tax on capital gains from dispositions of “taxable Canadian property.” Taxable Canadian property includes real estate situated in Canada, capital interests in certain partnerships and trusts, and shares of some corporations, certain business assets used in a business carried on in Canada and, in some cases, a Canadian resource property, a timber resource property, an income interest in a trust and a life insurance policy in Canada.
When a non-resident of Canada sells (or transfers to a trust, corporation or relative) real estate located in Canada, it is necessary to obtain a certificate of compliance for the disposition of taxable Canadian property, commonly referred to as a clearance certificate.
The application for a clearance certificate must be filed with Canada Revenue Agency (CRA) within 10 days of the closing date to avoid penalty. The steps in completing the filing are as follows:
- There must be a binding contract of sale or statement of adjustments for a completed sale.
- The vendor must be able to document the purchase of the property and any improvements to the property to establish the adjusted cost base. It can sometimes be difficult for the vendor to establish an adjusted cost base without proper invoices or paid cheques in which case the capital gain calculation may be challenged by CRA.
- If the property was rented, the vendor must have filed all necessary Canadian tax returns to report rental income.
- Vendors who are individuals must have or apply for a Canadian social insurance number.
The process of obtaining a clearance certificate can take several weeks depending on the nature of the sale. Funds will be withheld by the vendor’s lawyer until clearance is received and withholding taxes submitted.
The initial withholding is 25% (occasionally 50%) of the selling price of the property which is held in trust by the vendor’s lawyer.
- Once the clearance certificate is received, the withholding tax of 25% of the capital gain is remitted to CRA and the balance held in trust by the lawyer is forwarded to the vendor.
- The vendor must file a Canadian tax return for the calendar year in which the sale completed to report the capital gain and determine the actual tax liability. As additional costs are allowed as deductions at this stage, refunds are common.
The lawyer and accountant will typically coordinate the flow of documents. The waiting time can be lengthy but the process is generally not difficult.
There will always be exceptions and complications to the general rules. If you have questions, please contact Michael Pinch, CPA,CA at firstname.lastname@example.org or call 1 (250) 338-1324.