If a non-resident vendor sells property, one consideration that a purchaser must be cognizant of is whether that property constitutes “taxable Canadian property” under the Income Tax Act (Canada). If the property is taxable Canadian property and the vendor does not obtain a certificate of compliance (discussed below), generally the purchaser must withhold 25% of the purchase price and remit it to the Receiver General of Canada.
It should be noted that even a non-resident purchaser is required to make this withholding and remittance. The purpose of these rules is to allow the Government of Canada to secure its tax revenue from dispositions by non-resident vendors (since it may be difficult to collect these taxes from persons that live in other jurisdictions).
What is taxable Canadian property?
According to the Income Tax Act (Canada), taxable Canadian property includes:
- real or immovable property situated in Canada;
- property used in a business carried on in Canada;
- shares of a corporation that is not listed on a stock exchange if more than 50% of the value of those shares is derived from certain property (e.g., real or immovable property situated in Canada or Canadian resource property); and
- shares of a corporation that are listed on certain stock exchanges if more than 50% of the value of the shares is derived from certain property and certain ownership criteria are met.
Options and other interests in the properties discussed may also be considered taxable Canadian property.
It is noteworthy that the tax, if remitted by the purchaser, is not a final tax on the non-resident seller. Rather, it is a proxy for the capital gains tax that could be payable on the disposition of taxable Canadian property. If an amount is remitted but no (or less) tax is actually owing, the non-resident can apply to the Canada Revenue Agency for a refund by filing an income tax return.
Obtaining a certificate of compliance
To obtain a certificate of compliance, a non-resident vendor may send a notice to the Minister of National Revenue that sets out the name and address of the purchaser, a description of the property and the estimated proceeds of disposition and the adjusted cost base of the property to the vendor. In addition to the notice, a vendor should remit 25% of the amount that the estimated proceeds of disposition exceed the estimated adjusted cost base to the Receiver General (alternatively, security can be posted with the Minister). Once the notice and payment have been received, the Minister will issue a certificate of compliance to the vendor. This certificate provides evidence that the appropriate tax has been paid on the sale so that the purchaser does not have to withhold amounts from the purchase price, subject to the amounts outlined in the certificate.
Exceptions: treaty protected property
An exception to the withholding applies if the property under consideration is “treaty-protected property”. In that case the purchaser is not required to remit the tax to the Receiver General of Canada. For this exception to apply, the purchaser would need to conclude after reasonable inquiry that the non-resident person is resident in a country that has a tax treaty with Canada. Further, the property in question needs to be “treaty-protected property” of the non-resident assuming that non-resident were a resident in that particular country (generally, this means that a tax treaty would exempt such a gain on the disposition of the property from taxation in Canada). The purchaser must also file a notice with certain information to the Minister of National Revenue for this exception to apply.