One of the most difficult situations for the Canadian government when dealing with immigration issues is a Canadian Real Property purchase by non-residents. The struggle lives in the fact that the tax payment in this process has been largely circumvented.
The administration and enforcement of Canadian income tax law is generally Canada Revenue Agency’s responsibility, and that means that when someone is dishonest when purchasing a Real Property, all provinces are impacted by it.
How does the purchase of a Canadian Real Property for non-residents work?
Under Canadian tax law, if a non-resident of Canada wants to sell a Canadian Real Property, he’ll be subject to Canadian income tax on any gain on sale. To make sure it happens, Canadian tax law requires buyers to inquire whether the seller is a resident of Canada or not. If the seller is a resident of Canada, no tax is required to be withheld on the sale proceeds. On the other hand, if the seller is not a resident of Canada, 25% of the gross proceeds is required to be withheld by the buyer and remitted to Canada Revenue Agency.
It’s good to highlight that the 25% tax is a temporary withholding tax. The seller can request a reduction or refund of some or all this withholding tax. All they have to do is to fill applications and Canadian income tax returns showing the amount of the gain or loss.
How does the fraud occur?
The main problem is the when the seller misrepresents their residency status, leaving Canada Revenue Agency with very little information to track them down to pay any Canadian income tax liability. As long as the seller represents in writing to the buyer that they are not a non-resident of Canada, the buyer does not need to withhold Canadian income tax.
And, because the buyer is not required to examine or verify the statement by a seller that they are not a non-resident, the seller may be conducting all business out of Canada, or may show a non-Canadian address on their documents and may even request the funds to be transferred to outside Canada.
Some possible solutions
To make things more transparent, or at least easier to track, Canada could require sellers to provide the buyer with their Canadian Social Insurance Number or Taxpayer Identification Number. Another measure should be to make mandatory that the seller’s identity and the gross proceeds of the sale are provided directly to Canada Revenue Agency.
Something similar is required on the US system: a buyer is required to withhold US federal income tax on the gross proceeds on the sale of US real property by a non-US person. Where the seller cannot provide a US Individual Taxpayer Identification Number or a Social Security Number, the withholding tax is remitted to the Internal Revenue Service, forcing the seller to file a US federal income tax return to reconcile the gain amount and final tax with the withholding tax already paid. Representatives from the buyer provide information to the Internal Revenue Service on a sale by a non-US person including name, address and amount of gross proceeds.
Need help making sure you are following the law?
Those procedures can be very confusing and overwhelming, so the best idea is to rely on a specialist to make sure you are following the rules and having the best deal possible. Contact us or visit us on 505-1055 West Broadway to know more about this and other tax-issues.