What Non-Residents Canadians Should Know Before Selling Their Canadian Real Estate

Real estate transactions are complex, and if a non-resident is selling the property, there are additional administrative steps. If you are a non-resident of Canada as per the Income Tax laws and are considering selling a Canadian property, be prepared for some delays with receiving the entire sale proceeds and a 25% withholding tax.

In this article, we will understand how a real estate transaction takes place for a non-resident. We will also discuss the administrative steps they should take to ensure smooth and tax-efficient transactions.

Various Scenarios for the Sale of Real Estate

There are various scenarios in which a non-resident Canadian sells their Canadian property. One popular scenario is when they previously resided in Canada but permanently shifted to another country. Now, they want to sell the house and use the proceeds to buy another home in their new country of residence. Between shifting from Canada and settling in the new country, the house could have been left vacant or rented.

Scenario Where the Real Estate was the Principal Residence

In the above scenario, the seller can avail themselves of the principal residency exemption (PRE) for the years they occupied the property and claimed it as principal resident (PR). The PRE allows Canadians to sell their PR without paying any tax on the capital gain. So, even if you are a non-resident now, the PRE will apply to the years you were a Canadian resident.

For instance, John purchased a house in Canada in January 2015 for $400,000 and became a non-resident on January 30, 2024. However, he stayed in that house until January 10, 2024. He put up the property for sale in June 2024 and sold it for $700,000 in December 2024. During this period, the property was vacant.

He can also claim the property as a PR for the 2024 tax year because the CRA rule states that the owner must have “ordinarily inhabited it” at some point during the year, with no minimum time specified. John can claim PRE for one additional year, which is December 2025. This means that John can get PRE on the entire $300,000 capital gain.

Note: The one additional year benefit does not apply when an individual was a non-resident when he/she purchased the property.

There are also scenarios where the property has joint ownership or the resident county taxes foreign income. 

Scenario Where the Canadian Real Estate was Rental Property

Another scenario could be where the Canadian property was rented. The Canada Revenue Agency (CRA) requires the tenant to withhold 25% tax on the rent if the landlord is a non-resident. The landlord can file an income tax return and get a refund on any extra tax withheld. 

If the above process of withholding tax or filing tax returns was not followed, the CRA allows taxpayers to file the returns and pay taxes to avoid penalties voluntarily. A professional accountant can help you file all the pending returns and clear all tax dues with the CRA.

Scenario Where the Canadian Real Estate was Vacant

The CRA introduced a 1% Underused Housing Tax (UHT) on the value of residential property owned on December 31, 2022. The UHT applies to foreign nationals who are neither citizens nor permanent residents of Canada and own a vacant or underused residential real estate in Canada. Affected owners have to file a UHT return by April 30. Failure to do so could attract a penalty of the greater of the two:

• $5,000 for individual owners or $10,000 for non-individual owners
• A total of 5% of UHT payable for the calendar year or 3% of UHT for the calendar year for every complete calendar month delay

Before selling your house, you must also clear UHT dues and filing requirements.

The taxation and procedures could change depending on your scenario. Hence, it is crucial to seek the help of a professional accountant and lawyer specializing in real estate transactions.

How Tax Works for Non-Resident Canadians Selling Canadian Real Estate

For a Canadian tax resident selling a property, the process is straightforward. You declare 50% of the capital gain on the sales proceeds in your taxable income and avail yourself of tax benefits such as the PRE. If you sell a $400,000 property for $700,000, you pay your marginal tax rate on a $150,000 capital gain (50%).

The CRA can look for you in case of any discrepancy or additional taxation requirements. For non-residents, it does not have that option.

Hence, the CRA imposes a 25% withholding tax on the selling price of the property to cover tax liability, and this rate increases to 50% for a depreciable property, such as a rental building. If you sell the house for $700,000, you pay $175,000 in 25% withholding tax. 

Note: The withholding tax rate could increase to 35% from January 1, 2026, as the Canadian government increases the capital gain tax inclusion rate from 50% to 66.67%. 

Thankfully, non-residents can reduce their tax burden and claim tax refunds on the excess tax paid by obtaining a Certificate of Compliance and filing a Canadian income tax return. While the process is lengthy, the tax savings are significant and worth the effort.

How Non-Residents Can Reduce Withholding Tax on Sale of Canadian Real Estate

1. Hire a Professional Accountant: Once you decide to sell the property, list your property for sale and hire a professional accountant and lawyer to process the transaction.

2. Canadian Tax ID: Once you list the property, ensure you have a Canadian tax ID, as it is a pre-requisite to apply for a Certificate of Compliance (Form T2062).

3. Collect documents for Certificate of Compliance: The accountant will submit the application for the Certificate of Compliance. They will require details of:

• Buyer and Seller – full legal name, date of birth, contact details, address, tax identification number, and more.
• Property – full address, date of acquisition, the original purchase price, and the estimated or actual selling price.

List of documents depending on transaction and scenario.

• Purchase and sales agreement related to the purchase of the property
• Final statement of adjustments associated with the purchase of the property
• Summary of improvements made and the amounts spent along with the receipts of the amount spent on improvements.
• Supporting documents that you’re currently on title of the property
• Purchase and sales agreement related to the sale of the property

4. Submit the application: Once you accept an offer for sale, the accountant will submit the application for T2064. If PRE is applicable, the accountant will also submit Form T2091 – Designation of a Property as a Principal Residence by an Individual.

The CRA requires you to submit the application within 10 days of closing the property. However, submitting the application early is suggested as the CRA could take 8 to 10 weeks to issue the certificate.

5. Complete the sale: In the meantime, your sale is concluded, and the buyer pays. Until you obtain the Certificate of Compliance, your lawyer will hold 25% of the gross proceeds (35% after January 1, 2026) in a trust. You would receive cash proceeds after deducting this withholding and any other closing costs and mortgage obligations.

6. File Canadian tax returns: Non-residents have to file Form T1 by April 30 of the following year the property was sold. Here, you can deduct costs associated with the sale of property from your capital gain and get a refund for any excess tax paid. Failure to file returns by December 31 of the following calendar year could lead to higher penalties.

Contact KSSP Partners LLP in Markham to Help You with the Sale of Your Canadian Real Estate

Property transactions are complex and need expert guidance. Every scenario is unique and the tax laws keep changing. At KSSP Partners LLP, our accountants and tax experts can provide services such as filing all necessary documents and tax returns related to real estate sales. To learn more about how KSSP Partners LLP can provide you with the best accounting and tax expertise, contact us online or by telephone at 289-554-5997.