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Income Tax Act and Taxation Act concerning the sale of an immovable by a non-resident of Canada

Anyone who sells an income property or vacant land is likely to realize a capital gain. If they are not a Canadian resident*, they normally do not file their income tax returns in Canada, but rather in their place of residence.

In order to compel this non-resident to pay the tax that would otherwise be payable on the capital gain, the tax laws contain provisions requiring the non-resident to obtain a certificate from the provincial and federal Revenue departments authorizing him to sell and to withhold a certain sum of money representing the tax payable for the year of disposal of the property.

If the non-resident seller has obtained the certificates from the Revenue departments, the amount of the holdback will appear on both certificates.

* Non-resident of Canada for tax purposes:

• Lives in another country on a regular, normal or customary basis and is not considered a resident of Canada;
• Has no residential ties to Canada and is in one of the following situations:
  • lives outside Canada throughout the taxation year;
  • resides in Canada for less than 183 days in the taxation year.

Important to remember

• A non-resident who disposes of a taxable property located in Canada must obtain a certificate of compliance issued by the federal tax authorities
• If the immovable is located in Québec, he must also apply for a certificate from Revenu Québec.
• The application must be made no later than ten days after the sale of the immovable.
• However, at the time of sale, if the certificates have not been obtained, the notary will have to keep in his trust account an amount representing 25% of the proceeds of disposition (less the cost of acquisition) for the federal tax authorities;¹ this amount is 12% for the Quebec tax authorities.² The notary will not be able to remit these amounts, or the balance thereof, as the case may be, to the seller until the certificates are received.
• These holdbacks could prevent the sale from taking place for lack of equity, for example if the property is encumbered by a mortgage.
• Obtaining the certificates of compliance is essential for the buyer, who could be required to pay the above holdbacks to the federal and provincial governments, even if he has already paid the purchase price of the property in full.³
• Since it is the buyer who becomes liable under the applicable tax legislation, the governments could register a legal hypothec against the property so purchased in order to recover the amounts owed by the seller. Penalties provided for in the tax laws could also be imposed on the buyer.

¹ Income Tax Act, R.S.C. (1985), ch. 1 (5^th Supp.), s. 116.
² Taxation Act, CQLR, c. I-3, Part 9, s. 1097-1101.2.
³ Income Tax Act, R.S.C. (1985), ch. 1 (5^th Supp.), s. 116(5); Taxation Act, CQLR, c. I-3, Part 9, s. 1101.