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Buying a House in Canada from a Seller in the USA
With the relationship between the United States and Canada deteriorating as a result of the tariffs, many individuals living in the USA and owning residential properties in Canada may seek to sell them. This blog aims to clarify some of the complexities related to the purchase of a property from a non-resident of Canada for the purpose of the Income Tax Act. It also offers some information as to what lawyers and realtors do to protect their clients.
Non-Resident of Canada
People often confuse the definition of “resident of Canada” in the context of the Income Tax Act. Residency for income tax purposes does not depend on whether a person is a Canadian citizen or a permanent resident; rather, it hinges on whether the person has significant residential ties to Canada. For example, if an individual who is selling a property works and primarily lives in Canada with their family, then that person is resident of Canada for income tax purposes. If this person is selling their residential property that is their primary residence, then this transaction is not subject to capital gains tax.
On the other hand, if an individual who is selling their property lives and works in the USA, with their spouse and children also residing in the USA and earns all their main income in the USA, and they only visit Canada occasionally to check on their property, then that person is not considered a resident of Canada for income tax purposes. Hence, when that person is selling their property in Canada (even if it was their primary residence when they lived in Canada), that transaction is subject to capital gains tax.
Strong ties
Determining an individual’s residency status for tax purposes can be complex. There are cases where a person who does not primarily live or work in Canada may still be considered a resident for tax reasons due to “strong ties”. These strong ties can include having a spouse, common-law partner, children, bank accounts, credit cards, or investments in Canada. It’s essential to consider how the individual has been filing their taxes in Canada and how long they have spent in the country during the fiscal year.
For those living abroad and thinking about selling property in Canada, proper planning is crucial, as residency status can significantly affect the sale. It is advisable to consult an accountant for accurate tax advice and to request the Canada Revenue Agency’s (CRA) opinion on residency status ahead of time. Non-resident seller’s may not receive the full proceeds from their sales and should anticipate substantial delays in accessing their funds.
Withholdings
Buyers are required to withhold 25% of the gross proceeds of the purchase price of the property. If the property was rented at any point during the seller’s non-residency, buyers must withhold 50% of the gross proceeds. It is important to note that the withholding is calculated based on the gross proceeds, not the net sale price of the property. In practice, the lawyer representing the seller will hold the relevant amount (25% or 50%) in a trust account until a Tax Clearance Certificate is provided. This withheld amount ensures that the seller’s tax obligations are met, including any capital gains taxes that may apply.
A knowledgeable accountant can provide valuable guidance on how to obtain a Tax Clearance Certificate, which is a document confirming that the seller has settled all tax liabilities at the time the property is transferred to the new owners. It is recommended that sellers who are non-residents of Canada engage an accountant early in the process. The CRA issues a Tax Clearance Certificate after receiving the required tax payment from the disposition of the home. This payment must be made within 15 days of the date of the CRA’s letter requesting payment.
Buyer’s Potential Liability
If a buyer purchases a property from a non-resident of Canada, the CRA may issue an assessment against the buyer for unpaid taxes under subsection 227(10.1) and impose additional penalties under subsection 227(9) of the Income Tax Act. This potential liability may also arise in assignment agreements of residential purchase agreements. For example, if someone is the assignee of a residential purchase agreement, the assignee may be assessed by the CRA for any increase in property value if the assignor was not a resident of Canada according to the Income Tax Act at the time of the assignment.
Buyers face significant risks if they do not take reasonable precautions. In our office, as part of our due diligence, we communicate with the realtor representing the buyer to gather as much pertinent information as possible about the seller. Understanding how the purchase agreement was executed is a good starting point in this determination process. When representing the seller, we also conduct due diligence to verify if the seller is a resident of Canada for tax purposes. A seller who is not a Canadian resident should not sign a certificate claiming they are a resident, as this would be considered fraudulent. Misrepresentation by the seller in the purchase contract could lead to additional liabilities.
How to Protect Yourself from Potential Liability
Hiring a reputable realtor is essential when buying or selling a property. An experienced realtor representing the buyer will ask the right questions to determine the seller’s residency status. Questions to consider might include: Why is the seller signing in Texas? How long has the seller lived there? Has the seller moved there with their entire family? Documenting the answers to these questions can provide essential protection for the client. It is a good idea to keep a written record of the answers to these questions. For example, this record can be created by sending an email to the other agent summarizing the responses received.
If the realtor is representing a seller who is not a resident of Canada, the realtor needs to ask their client several questions to confirm the client’s residency status. If the realtor discovers that the client is not a resident, they must determine whether to withhold 25% or 50% of the sale proceeds, depending on the situation. If the withholdings are possible after paying the mortgage, if any, it is considered best practice to amend the residential purchase agreement to indicate that the seller is not a resident of Canada for income tax purposes. Striking out the relevant provisions of the agreement that deal with the residency representations may suffice.
