In recent years, Canada has established itself as an attractive destination for foreign investors looking to invest in real estate. However, navigating the complexities of Canadian tax laws can be a daunting task. This blog explores the implications of owning Canadian real property, focusing on your income tax, and filing obligations including the upcoming withholding tax increase in 2025.
Tax & Filing Obligations for Non-Residents Owning Canadian Rental Property
As a non-resident property owner, any rental income generated from your Canadian real estate is subject to Canadian taxation. Non-residents are required to file an annual tax return to report this income and discharge their tax obligations.
The tax rate on rental income for non-residents is set at 25%. This amount is withheld at source, meaning that a quarter of your rental revenue is automatically retained by the government before you receive your funds (unless you engage a Canadian withholding tax agent and receive prior approval to withholding on the “net” basis). Maintaining accurate records of all rental income and related expenses is essential for ensuring compliance and facilitating tax reporting.
Selling Your Property
For non-residents, selling Canadian real estate involves specific compliance with section 116 of the Income Tax Act. This section lays out the rules for withholding taxes on property sales involving non-residents. For example, when a non-resident sells a property in Canada, the buyer is currently mandated to withhold 25% (or 50% if a depreciable property) of the gross selling price to cover potential tax liabilities. The rate applicable to this withholding is intended to approximate the combined federal and provincial tax payable on capital gains at the highest marginal tax rates. Effective January 1, 2025, this withholding rate will be raised from 25% to 35%. To avoid withholding this amount, the seller must obtain a clearance certificate from the Canada Revenue Agency (CRA). Here’s a breakdown of the process:
Prepare Documentation: Gather necessary documents, including proof of the property’s purchase price, the sale price, and any related transaction costs. This includes completing ALL Canadian income tax returns if you are selling a rental property. You MUST be update to date on ALL of your filing obligations with CRA.
Timely Application: Submit your application for a clearance certificate to the CRA well in advance of closing the sale. You only have 10 days from the date of close.
CRA Approval: After reviewing your application, the CRA will issue a clearance certificate if all conditions are satisfied. This certificate relieves the buyer from withholding the specified amount, allowing them to pay you the full sale price.
Failure to comply with section 116 can result in significant penalties, so it’s advisable to consult your Welch LLP representative if you have any doubts.
