When non-resident individuals sell property in Ontario, there are specific tax implications that both sellers and buyers need to be aware of, particularly regarding capital gains tax. Understanding who is responsible for collecting this tax and the options available can help ensure a smooth transaction.
Capital Gains Tax for Non-Resident Sellers
Capital gains tax is a tax on the profit made from the sale of a property. For non-resident sellers, the Canadian government requires that capital gains tax be paid on the sale of Canadian property. This tax is calculated based on the difference between the sale price and the original purchase price, adjusted for any eligible expenses or improvements.
Withholding Tax
To ensure that the Canadian government collects the appropriate capital gains tax from non-resident sellers, there is a withholding tax mechanism in place. When a non-resident sells a property, the buyer is typically required to withhold 25% of the gross sale price and remit it to the Canada Revenue Agency (CRA). This amount can be higher for certain types of property or if the seller does not comply with CRA requirements.
Responsibility for Collecting Capital Gains
The Buyer’s Role
In Ontario, the buyer is responsible for ensuring that the appropriate amount of tax is withheld and submitted to the CRA. This responsibility arises because the buyer can be held liable for the unpaid tax if the proper amount is not withheld and remitted. To protect themselves, buyers should:
- Withhold the Required Amount: Typically, this is 25% of the purchase price.
- Request a Clearance Certificate: Buyers should request a certificate from the non-resident seller, issued by the CRA, which indicates that the seller has made arrangements to pay the tax. This certificate reduces the buyer’s liability.
The Seller’s Role
Non-resident sellers should be proactive in managing their tax obligations to facilitate a smooth transaction. They should:
- Notify the CRA: Inform the CRA of the sale and the estimated capital gains tax owed.
- Apply for a Clearance Certificate: This involves filing forms with the CRA and potentially paying a portion of the estimated tax upfront. The clearance certificate confirms that the seller has either paid the tax or made arrangements to do so, which allows the buyer to remit a lower withholding amount or none at all.
- File a Canadian Tax Return: After the sale, the non-resident seller must file a Canadian tax return to report the actual capital gain and reconcile any taxes owed or refunds due.
Options Available for Non-Resident Sellers
Clearance Certificate
Obtaining a clearance certificate is a key step for non-resident sellers. This certificate is obtained by submitting Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property) to the CRA. The seller may need to pay an estimated tax amount before receiving the certificate. Once obtained, this certificate allows the buyer to remit less than the standard 25% withholding tax.
Reducing Withholding Tax
Non-resident sellers can potentially reduce the withholding tax by:
- Providing Documentation: Offering evidence of the property’s adjusted cost base and any capital improvements can help reduce the apparent capital gain.
- Prepaying Estimated Tax: By paying a portion of the estimated capital gains tax upfront, the seller can reduce the amount that the buyer needs to withhold and remit.
Filing a Tax Return
Even after obtaining a clearance certificate, the non-resident seller must file a Canadian tax return for the year the property was sold. This return will detail the actual capital gain or loss and calculate the final tax owed. The seller may be eligible for a refund if the actual tax liability is less than the amount withheld.
Conclusion
Navigating the sale of property by non-resident sellers in Ontario involves understanding the responsibilities related to capital gains tax. Buyers must ensure that the appropriate withholding tax is remitted to the CRA to avoid liability, while sellers should take proactive steps to manage their tax obligations, including obtaining a clearance certificate and filing a Canadian tax return. By understanding these requirements and options, both parties can ensure a smooth and compliant transaction.
