Homebuyers: Know Your Tax Obligation Before Buying Real Estate from Non-Residents

Canada is known for its real estate. Several foreign investors buy property in Canada for investment purposes and sell it at an elevated price. If you are a Canadian resident purchasing a real estate property (residential or commercial), you should check the residential status of the current property owner from whom you buy.

If the owner is a non-resident, you are under the obligation to withhold 25% tax on the purchase price of the property or risk paying it from your pocket. For a $350,000 property, you could face an $87,500 tax obligation.

As a resident buyer, you can protect yourself from this tax obligation if the seller provides you with a “section 116 certificate” from the Canada Revenue Agency (CRA).

This article will explain the tax obligation in property transactions between a resident and a non-resident.

How Does Tax Work for Non-Residents?

The way the Canadian tax system works, one has to pay tax on the income earned in Canada, whether they are residents or non-residents. If residents earn income, the CRA can enforce tax collection.

If non-residents earn income in Canada from selling Canadian real property, they should inform the CRA within ten days of the sale and pay tax on the capital gain. If they don’t do so, the CRA has no way to collect tax from the non-resident. Hence, the agency shifts the onus of collecting the tax onto the resident paying the non-resident.

Section 116 of the Income Tax Act makes the purchaser potentially liable for the vendor’s capital gains tax.

Buyer’s Tax Obligation When Purchasing Real Estate Property from Non-Residents

Let us understand the tax obligations with the help of an example.

Jason is a Canadian resident who is buying a $350,000 Canadian property from Tanya. Jason hires a real estate lawyer and learns that Tanya is a non-resident. He will withhold $87,500 (25%) tax and remit it to the CRA on behalf of Tanya within 30 days after the end of the month in which he purchased the property. He will pay Tanya the remaining $262,500. If Jason fails to withhold the tax, he has to pay the $87,500 tax to the CRA from his pocket.

Note: The 25% withholding tax could be 50% if the property, such as rental property, can depreciate.

Hence, if you are buying a house and unsure about the resident status of the seller, it is better to withhold the tax. Otherwise, before buying a property from a non-resident, you can ask for a “section 116 certificate.” 

The certificate proves that the seller has already paid the capital gain tax to the CRA, removing the tax collection obligation from the buyer.

Note that 25% of the property price is a very high tax. Generally, the tax is levied on capital gain and not the property’s purchase price.

How Can Non-Residents Protect Themselves from Withholding Tax?

Let’s look at the same transaction from a non-resident’s perspective. Tanya purchased the house for $250,000 and is now selling it for $350,000, earning a capital gain of $100,000. She is liable to pay tax on 50% of the capital gain, which is $50,000. And $50,000 is the taxable income the tax will be calculated.

Note: the 25% withholding rate will increase to 35% starting January 1, 2025, as the taxable amount will increase from 50% of capital gains to 66% as of June 25, 2024.

Tanya can avoid this significant financial consequence arising from the 25% withholding tax by paying the tax herself and obtaining the Certificate of Compliance (section 116 certificate). This certificate will also increase her chances of finding a buyer for the property.

How to Obtain the Certificate of Compliance?

The non-resident seller should apply to the CRA for a Section 116 Certificate and pay the tax at least 30 days before disposing of the property. Upon receipt of the application, the CRA will review the transaction and verify that the seller’s payment is adequate. Once satisfied, it will issue the certificate. It is suggested non-residents apply earlier as obtaining the certificate could take months.

Timing is of the essence here. The buyer will withhold 25% tax while the parties wait for the CRA to provide the certificate. If the time gap is long, the seller must bear the mortgage, the realtor’s commission, and other charges. A professional tax expert can help non-residents smoothen this process and timely execute the sale with minimum tax implications.

Withholding tax on the Sale of a Purchaser’s Right

The withholding tax obligation also applies to the sale of a purchaser’s right under an Agreement of Purchase and Sale. For example, you want to buy an apartment in an under-construction building where all apartments are sold. Two years back, a non-resident paid a deposit of $25,000 and purchased the right to buy an apartment in the building when the price was $250,000. Now, the price has increased to $350,000.

You can buy the right from the non-resident by paying $125,000 (The $100,000 capital appreciation and the $25,000 deposit). In this case, the resident buyer will withhold tax on the purchase price of the right, which is $125,000.

Contact Hagar Liao CPA Professional Corporation in Mississauga to Help You with Real Estate Property Transactions

Real estate transactions can get tricky. Talk to a professional tax expert to help you process your real estate property transactions smoothly and tax efficiently. To learn more about how Hagar Liao CPA Professional Corporation can provide you with the best tax expertise, contact us online or by telephone at 289-803-1818.