When a non-resident of Canada, which can include non-resident Canadian Citizens, sells real estate, there are serious tax implications that can impact both the seller and the buyer. Failure to follow the rules can result in the buyer being on the hook for tens or even hundreds of thousands of dollars.
- Non-Residents MUST Obtain a Clearance Certificate
A non-resident seller must apply to the Canada Revenue Agency (CRA) for a Certificate of Compliance (commonly called a “Section 116 Certificate”). This ensures any capital gains tax owing on the sale is accounted for. Without this certificate, the seller risks large hold-backs of up to 50% of the sale price. If the seller does not have enough equity in the property after paying off the mortgage and expenses to cover this hold-back, the seller must ensure that the closing date is far enough away that the certificate can be obtained before the closing date. - Buyers MUST Protect Themselves
If the seller is a non-resident and does not provide a clearance certificate, the buyer is legally required to withhold 25% of the purchase price (or more in some cases) and send it to CRA. If the buyer fails to do this, CRA can come after the buyer—even years later—for the unpaid tax. The standard agreement of purchase and sale requires that the seller provide a Statutory Declaration (Certificate) confirming that the seller is not a non-resident or sufficient funds to cover the tax are paid to CRA. - Funds WILL Be Withheld
Typically, the buyer’s lawyer will hold back 25–50% of the sale price until CRA issues the clearance certificate. This protects the buyer but can significantly delay the seller receiving their money. When the certificate is issued and the tax liability is determined, the buyer’s lawyer will direct payment to the CRA to satisfy the certificate tax amount and return the balance to the seller.
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