As a Foreign Seller looking to sell property in Canada, it is crucial to be aware of other significant concerns, in addition to the ongoing discussions surrounding the Foreign Buyer's Ban.
In the context of a residential real estate transaction in Canada, withholding tax can apply to non-resident sellers of the property. The amount of withholding tax that a buyer of residential real estate in Canada may be required to withhold and remit to the Canada Revenue Agency (CRA) on behalf of a non-resident seller depends on the type of property being sold and whether it was used to generate income.
If the seller is a non-resident of Canada and the property was used to generate income, the buyer is required to withhold and remit 25% of the sale price related to the land value plus 50% of the sale price related to the building value, unless the seller obtains a Clearance Certificate from the CRA. If the property is capital property, meaning it is a personal-use property, such as a cottage or vacation home, and was not used to generate income, the buyer is required to withhold and remit 25% of the gross sale price.
Filing for a Clearance Certificate with the CRA as soon as your property is sold is best to avoid a withholding tax. If the seller applies for and obtains a Clearance Certificate from the CRA before the sale, they can provide it to the buyer, who then does not have to withhold any tax from the sale price. The Clearance Certificate confirms that the seller has complied with all Canadian tax laws and does not owe any taxes.
On the other hand, if the buyer fails to withhold the required amount of tax, they may be liable for any taxes owed by the seller, plus interest and penalties.
A Clearance Certificate is required in a residential real estate transaction in Canada when the seller is a non-resident of Canada. The certificate confirms that the seller has complied with all Canadian tax laws and does not owe any taxes. The Clearance Certificate serves as proof that the non-resident seller has paid any taxes owed to the Canada Revenue Agency (CRA) related to the sale of the property.
Obtaining a Clearance Certificate is the responsibility of the seller, who must apply to the CRA for the certificate after the sale has been completed. The application process can take several weeks to complete, and the seller must provide documentation to the CRA to support the application.
It's important for non-resident sellers of residential real estate in Canada to obtain a Clearance Certificate to avoid any delays or complications in the sale process. It's important to note that the rules and requirements related to withholding tax in residential real estate transactions can be complex and vary depending on the specific circumstances. Sellers and buyers of residential real estate in Canada should consult with a tax professional or lawyer to ensure compliance with applicable tax laws and regulations.
Seller of Underused Housing "Tax"
The Underused Housing Tax in Canada is an annual 1% tax on vacant or underused housing, which came into effect on January 1, 2022. The tax is primarily targeted towards non-resident, non-Canadian owners, although it can also apply to Canadian owners in certain circumstances. It is important to note that failure to file a return for this tax can result in significant penalties, with minimum penalties of $5,000 for individuals and $10,000 for corporations.
If you are a foreign seller of Airbnb properties, you may be required to pay the Underused Housing Tax. The tax applies to foreign real estate owners who do not reside in or rent out their properties. However, if your property has been occupied for at least 180 days in a year, you may be exempt from this tax.
It is also worth noting that detached residential homes with more than 3 self-contained “dwelling units” are automatically exempt from the Underused Housing Tax. Furthermore, if a detached home has at least 4 separate rentable dwelling units with private kitchen, bath, and living areas, it is exempt from the tax even if the rentals are less than one month at a time. However, this exemption only applies to detached homes and not to semi-detached homes, townhouses, or condos.
In summary, as a foreign seller, you need to consider the Underused Housing Tax when selling an underused or vacant property in Canada. If you are unsure whether this tax applies to your property, it is recommended that you seek professional advice from a tax specialist or lawyer.