Real Estate Accounting: How To Pay Taxes As A Non-resident Owner Of Canadian Real Estate
Real estate accounting can be clouded with confusion regarding paying taxes as a non-resident of Canada. As if powered by rocket fuel, the pace of price gains in Canada’s real estate market over the past two years can only be described as staggering.
Between January 2020 and March 2022, the average home price soared from $504,350 to $795, 952, according to Canadian Real Estate Association data, though the average price has started to decline in recent months.
Amid the unprecedented growth, the Canadian real estate market continues to be attractive, particularly as U.S. and other foreign buyers look to invest in vacation and rental property.
What do accountants do for non-residents with Canadian real estate? What taxes will I have to pay?
Nonresident owners of Canadian residential property often encounter an unpleasant surprise in the form of a significant Canadian income tax liability when they ultimately sell that real estate. Most nonresidents who own real property, and who earn rental income, in Canada may also be unaware of the associated withholding tax requirement and filing obligations. So, what do accountants do?
In hopes of avoiding a nasty tax letter from the Canadian tax authorities, below we aim to provide the individual nonresident property owner with general information concerning Canadian income tax filing requirements, both ongoing and at the time of disposition of residential real property. Owning real estate in corporations, trusts or partnerships may also have similar implications, but these structures and their related rules are not discussed herein.
Where can I find a real estate accountant near me?
Although there are many tax accountants in Canada and the USA, for non-resident real estate tax you want to make sure you are dealing with an established real estate accountant near me who has experience with both crossborder taxes and knowledge based on Canadian real estate taxes.
Based on recommendations from Canadian realtors and available cross border accountants, Numis CPA accounting in Vancouver BC specializes in both sectors and offers accounting services for residents and non-residents who are looking to have their real estate taxes professionally handled to ensure penalties and unnecessary fees are avoided.
Numis Accounting offers a free consultation over the phone and after a quick conversation we learned they also provide strategies based on your portfolio to ensure investors, landlords and homeowners are aligned with the best tax strategy possible. They can also help with standard Canadian resident real estate accounting.
We recommend taking advantage of the free consultation by entering your contact information on their website and a tax professional will reach out to discuss options.
INCOME TAX IMPLICATIONS OF THE DISPOSAL OF CANADIAN REAL ESTATE BY A NONRESIDENT OF CANADA
WITHHOLDING TAX – DISPOSAL
What are the requirements for withholding tax from CRA for accounting for real estate for non-residents?
Any person purchasing Canadian real estate from a nonresident has an obligation to withhold and remit to the Canada Revenue Agency (CRA) 25% of the gross sale proceeds with respect to the purchase. While accounting for real estate, this liability increases to 50% where the real estate was depreciable property (a building used for rental or business purposes) or where the real estate was not held by the nonresident as capital property (for example, held for speculative purposes).
A purchaser who fails to withhold this tax is liable for it (unless they had no reason to believe that the vendor was not a Canadian resident) and CRA has the ability to enforce this liability. Because of this substantial purchaser’s liability, it is standard practice for a purchaser’s legal advisor to either require the vendor to certify in writing as to the vendor’s Canadian residency status or require withholding of this tax.
The withholding tax requirements can be reduced or eliminated if the vendor obtains a “Certificate of Compliance” from CRA on a timely basis. This process requires the filing of a form with CRA in advance of the disposition or within 10 days thereafter, together with evidence as to what the sale proceeds are and what the vendor’s adjusted cost base of the property is. (Penalties may apply in the event of late filing). One result of this filing is to allow the withholding tax to be calculated at 25% (or 50% as applicable) of the gross sale proceeds net of the purchase cost of the property.
What is a CRA Certificate of Compliance for Real Estate Accountants?
CRA will review and approve the information and, upon receipt of the appropriate withholding tax, issue a Certificate of Compliance. Note that where the vendor’s proceeds are less than or equal to cost, the withholding tax will be entirely eliminated by this process.
A Certificate of Compliance is required any time that a disposition by a nonresident occurs and thus must also be obtained if the property is gifted by a non-resident, regardless of whether or not a gain is realized on the property. Where a gift occurs, the “proceeds” for these purposes are considered to be the value of the property at the time that the gift is made.
No Compliance Certificate is required where there is a “deemed” disposal on the death of a nonresident, but the executor acting on behalf of the decedent will still be required to file a tax return for the nonresident for the year of death to report any “deemed” gain or loss realized on the death of the individual.
CRA will typically recognize the effect of a principal residence designation in processing a Certificate of Compliance. Thus, a nonresident who was formerly a resident of Canada and who is selling a former principal residence may have the withholding tax liability reduced by virtue of a principal residence designation.
Furthermore, if a tax treaty between Canada and the vendor’s home country apply to reduce the non resident’s tax liability with respect to the disposal, CRA will generally allow the withholding tax to be reduced upon proof being provided that the tax treaty exemption will apply to the disposal.
How long does CRA take to process a Certificate of Compliance?
Due to backlogs at the CRA, a request to process a Certificate of Compliance could take months (although they will provide expedited service in cases of hardship, generally where the sale cannot be completed unless the certificate is provided prior to closing). Where a certificate cannot be obtained from CRA prior to closing, the vendor’s lawyer will often agree to hold the required percentage of the gross proceeds in trust pending receipt of the certificate.
Although the purchaser has a statutory requirement to remit the tax within 30 days after the end of the month following closing, this requirement is not generally enforced by CRA where the Certificate of Compliance request has been filed on a timely basis. The buyer can avoid making a withholding tax payment to the CRA within 30 days after the end of the month when the sale occurred if a comfort letter is obtained.
A comfort letter can be requested by the seller at the time of submitting the request to the CRA. In practice, if a comfort letter is issued, the buyer’s lawyer can continue to hold the funds withheld from the purchase price (25% or 50% of the gross proceeds) in escrow beyond the remittance deadline without incurring any penalties or interest. When the certificate of compliance is obtained, any excess withholding taxes above the amount calculated in the certificate of compliance can then be released to the non-resident seller.
Also note that before the Certificate of Compliance is released, the nonresident will have to pay any outstanding income tax or any unpaid withholding tax on rental income. (A more detailed discussion of withholding tax requirements on rental income is discussed later).
Non-resident owners who fail to notify CRA within the 10-day period may be subject to a penalty of up to $2,500 ($25 per day for each day the notification is late). The penalty is applicable regardless of whether any withholding tax is payable with respect to the disposition.
CANADIAN TAX RETURN FOR YEAR OF DISPOSITION
The process described above constitutes a withholding tax only. The actual Canadian income tax liability is determined by filing a Canadian tax return by April 30 of the following year. That return will usually only include the property disposition and often results in a refund of tax to the non-resident, particularly as the withholding tax rate typically is higher than the actual (or effective) tax rate.
Another reason for the potential refund is that the costs of disposal, including real estate commissions, legal fees, etc., reduce taxes payable on the tax return, whereas they do not reduce the withholding tax payable for Certificate of Compliance purposes. Late-filed returns are permitted within certain limits.
What are the income tax implications of the rental of Canadian real estate by a non-resident of Canada?
The non-resident real estate owner is often under the impression that rental income earned from Canadian real estate bears no ongoing Canadian income tax liability, particularly if costs associated with the rental (interest, property taxes, etc.) exceed the gross rents received. This is not the case and failure to adhere to the proper filing procedures as described below can result in large Canadian income tax liabilities that could have been avoided had those filings been made.
As a non-resident can I withhold tax on gross rent?
The non-resident landlord is obligated to pay a specified percentage (usually 25%) of the gross rent received on account of withholding tax. The nonresident will normally engage a Canadian agent (i.e., property manager, Canadian family member, or friend) to collect the rents and remit them to the CRA on their behalf.
Alternatively, in some cases, the tenant may also pay the withholding tax directly to the CRA. The agent or payer is obligated to remit this tax to the CRA on or before the 15th day of the month following the month that the rental income is paid or credited to the non-resident.
In cases where there are significant rental expenses, the 25% withholding tax obligation may constitute a hardship to the nonresident. Form NR6 can be filed with the CRA to provide relief from the “25% of gross” withholding tax, and instead the Canadian agent can withhold 25% of the net rental income (after rental expenses), thus providing more cash flow to the nonresident landlord on a monthly basis.
The Form NR6 requires the filing of a statement showing estimated income and expenses for the upcoming year and an undertaking (jointly between the nonresident and their agent) to file a special nonresident Canadian tax return (T1159 “Income Tax Return for Electing Under Section 216”, also simply known as “Section 216”, or just “216”) to report the income and expenses within 6 months after the end of the calendar year.
Generally, the NR6 must be filed annually before the start of each relevant calendar year, or before the first rental payment is due for that respective tax year. Where an NR6 is filed and accepted by CRA, the withholding tax requirement can be reduced to 25% of the estimated net income (before capital cost allowance, otherwise known as depreciation) from the property. This can eliminate the remittance of withholding tax where the rental income is offset by sufficient rental expenses.
Note, however, that where the nonresident does not file a T1 return within 6 months of the end of the calendar year, he/she and their agent become liable for the 25% tax on gross rent. Also note that in the event that the reduced withholding tax is insufficient to fully offset Canadian income tax calculated at the regular rates, any deficiency must be paid with the T1 return filed for the year.
Asking Canadian tax accountants: Am I required to file a T1 Tax return as a foreign property owner?
As noted above, the filing of a Section 216 tax return is mandatory where an NR6 is filed to reduce or eliminate withholding tax. This is the answer you will get from asking professional US Canadian tax accountants. Where an NR6 is not filed, an “elective” T1 return may still be filed within two years from the end of the relevant calendar year in order to recover tax withheld in excess of the actual tax liability that would rise on the net rental income computed at regular Canadian rates.
This return can also be filed by a non–resident landlord who may have been renting out his/her property for a number of years, unaware that they had any Canadian filing requirements. In such a case, filing elective returns now may alleviate a tax liability in respect of previously unremitted withholding tax, at least to the extent that the late filing of returns is allowed under the two-year deadline referred to above.
CRA’s current practice is to accept late filed returns outside the two-year period if this is the only time the taxpayer has late filed such returns and if the CRA has not made a demand for them to file the returns.
It was formerly common for nonresidents to ignore both the “25% of gross” withholding tax and the NR6 requirements and simply file Canadian T1 returns reporting the rental income on a net basis after the end of the calendar year. CRA no longer permits this practice and they will now assess the 25% gross withholding tax plus interest where an NR6 is not filed on a timely basis.
As a non-resident will I be submitting a NR6 or NR4 information return?
Regardless of whether or not an NR6 has been filed, an information return form (Form NR4) must be filed for the calendar year by the non-resident's agent by March 31 of the following year. This information return reports the gross rental income received by the nonresident and the amount of any withholding tax paid to CRA. Failure to file (or late filing of) this return information can result in the assessment of penalties.
Conclusion
As noted above, the parties don’t have a lot of time to gather the information to file the Notification within 10 days after the disposition, particularly given that the information requested on Forms T2062 and T2062A can be very extensive. Therefore, the buyers and non-resident owners should always include their tax advisor at an early stage of the transaction since the Notification could be made earlier as a proposed transaction.
Due to the purchaser liability provisions of the Canadian Income Tax Act, a nonresident real property owner cannot escape the Canadian tax net. Vendors who ignore the rules, particularly landlords, can be subject to significant income tax liabilities – and potentially penalties – where proper procedures are not followed.
Real estate in the B.C. lower mainland and throughout Canada will continue to be an attractive place to invest for both residents and non-residents. With the international borders now open as COVID-19 restrictions have eased, we can expect to see more transactions in the real estate market by non-residents.
This sounds confusing *searches crossborder tax accountant near me*
This is not an exhaustive list of all the factors that should be considered when owning real estate in Canada. Non-resident owners should also be aware of any foreign buyer tax and speculation tax (provisionally and federally).
Please contact your Numis tax professional or someone from the Numis team with any questions or to discuss how these rules may specifically impact you. Some people can get overwhelmed while searching for a cross-border tax accountant near me.
Find a U.S. Canada tax accountant near me that has experience with non-resident real estate taxes.
I am looking for a U.S.Canada tax accountant near me. Well, you are in luck. We highly recommend contacting a cross-border tax specialist that deals with real estate tax for non-residents such as Numis CPA based in Vancouver, Canada. Click below for a free consultation with a Numis CPA Tax Professional.
The information provided in this publication is intended for general purposes only. Care has been taken to ensure that the information herein is accurate; however, no representation is made as to the accuracy thereof. The information should not be relied upon to replace specific professional advice.
