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Posted by Tax Consultants

Non-residents

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 Income Tax Issues – Section 216 of the Income Tax Act (ITA)
 
Non- resident Section 216 tax returns
 
If there is income being earned from the property, a tax return may be required to be filed each year. This tax return is known as  the Income Tax Return for Electing Under Section 216 Rental Return.

If you are receiving income, your tenant is required to remit withholding tax on the rent to the Government, generally the withholding tax is 25% on most types of rental income. The withholding tax is considered a prepaid tax, and the non resident uses this amount as a credit on their Section 216 Tax Return. The withholding tax is often all or partially refunded once the expenses are claimed against the rental income.

However there is an opportunity to send in 25% of the net income from the rental property rather than 25% of the gross income if you have an agent in Canada that is willing to complete an NR6 form for you. This form basically states that the agent will vouch for you, that you (the non resident), will file a tax return each year and the agent will ensure that 25% of the net income is sent in each month. Often there is a loss on these rental properties at the beginning, so with an approved NR6 on file there would not need to be any withholding tax sent in.

GST/HST Issues
Should you register for GST/HST? If you do, what does it mean?

You are able to register for GST/HST if you will be using your property for short term rentals (less than 30 days at a time) If you are registered for GST/HST you will need to collect GST/HST on your rental income and you will be able to claim back the HST/GST paid on your expenses, including the purchase of your property.

If you are an individual registered for GST/HST you must be using the property more than 50% of the time for short term rentals to be able to claim back any of the GST/HST on your expenses.

Buying Property in Canada

From a residency point of view, if you plan to stay in Canada for 6 months or less each year, the government considers you a non-resident, which means that you can still open a bank account and buy property, etc. If you plan to live in Canada for more than 6 months per year, you must apply for immigrant status.

It is important to note, however, that while the majority of Provinces (British Columbia, Ontario, Quebec, Nova Scotia, Newfoundland, New Brunswick) have no restrictions on foreign ownership of real estate in Canada, some do limit the amount of property/land that a non-resident can purchase. On Prince Edward Island, non-resident buyers must apply to the Island Regulatory and Appeals Commission for land over 5 acres in size, or land with a shore frontage greater than 165 feet. In Manitoba, non-residents are prevented from owning farmland unless they actually plan to move there within 2 years. Non-residents may not own land over 10 acres in size in Saskatchewan, whilst in Alberta they may only own up to 2 plots of land not exceeding 20 acres in total.

Selling Property in Canada

When a non-resident sells Canadian real estate, he/she is required to pay the appropriate amount of taxes on any capital gain. The normal Canadian tax rates will be applied to 50% of the gain. However, a non-resident is required to pay an estimate of the tax before the sale, an amount equal to 25%-50% of the gross sale. This amount is to be retained by the seller’s lawyer until such time as a clearance certificate is received from the Canada Revenue Agency (CRA) in connection with the sale of the property. Upon payment, the CRA will issue a clearance certificate to the seller, but not until there has been a contract of purchase and sale with all subjects (conditions) removed. The wait for the certificate is usually 6-8 weeks. On or before the closing date, the mortgage money is transferred to the seller’s lawyer and then to the seller and the title is transferred to the buyer’s name.

The non-resident seller should file a Canadian income tax return for the year in which the sale occurs and should expect to receive a refund of a portion of the taxes paid. The taxation of Canadian real estate depends on whether the use of the property is for a principal residence, an active business or as a rental property. If it is used as a rental property, a 25% non-resident tax must be paid on the gross rent a tenant pays. However, if you use a professional property manager, the manager will, by law, withhold 25% of the gross rental revenue at source to be remitted to the Canada Revenue Agency. Then on or before March 31 of the following year, the property manager issues an NR4 form and you then have the right to file a Canadian tax return. The tax return is due before June 30 and enables you to claim expenses against that income and potentially request a refund.

Many countries, such as the U.S., have tax treaties with Canada that prevent you from being taxed in both Canada and your home country. It is advisable to contact a tax accountant in your country for more information.

Additional Costs and Fees when Buying and Selling Property

The following represents many of the additional costs and fees incorporated when buying property. Your realtor will be able to let you know which are applicable in your Province.

Taxes

Non-residents of Canada pay tax on income received from sources in Canada. The type of tax paid, and the requirement to file income tax returns, depends on the type of income received.

Canada has tax treaties with many countries, including the United States and the UK. A tax treaty is designed to avoid double taxation for people who would otherwise pay tax on the same income in two countries.

Property Transfer (or Purchase) Tax / Land Transfer Fees are calculated between 0.5-2% of the property’s total value (not applicable in Alberta, rural Nova Scotia or Saskatchewan). They are generally 1% of the first $200,000 of the value and 2% of the remainder.

Since the 2005 Provincial Budget, Property Transfer Tax (PTT) is now exempt for individuals buying their first home as long as they meet certain criteria, namely that they are a Canadian citizen or Permanent Resident and have never owned a home anywhere in the world; that they have lived in the province for at least one year prior to purchase; that they have filed two Canadian tax returns within the last six years; and that they must occupy the property as their principal residence for the first year of ownership. There are also proportional exemptions to PTT for first-time home buyers which vary by region based on the fair market value of the property.

As of December 2007, the Ontario Provincial Land Transfer Tax exemption for first time buyers (up to $2,000) now applies to resale as well as newly constructed homes. Similarly, from February 2008, Toronto (and this may spread to other provincial cities) has its own Land Transfer Tax which allows first time home buyers of both new and resale homes to qualify for a rebate.

If the property is vacant land, the house must be constructed within one year of closing and the buyer must live in the house for the balance of the year.

There are other criteria needed as well to qualify for the PTT exemption, so it is best to consult a lawyer or notary.

Clearance Certificate The typical fees associated with preparing and filing a clearance certificate, paid by the seller, range from $300-$1000, depending on the complexity of the transaction.

Capital Gains Tax is not applicable on your principal residence.

Goods and Services Tax (HST) of 12% is only payable on newly constructed homes and is often included in the quoted sales price.

Property Tax is an annual fee levied within local communities, which means there are many different rates within each province. The difference between Property Tax and Property Transfer Tax is that PTT is a one-time provincial tax which comes into effect upon transfer of property and Property Tax is paid annually to the local taxation authorities. It is determined by applying the value of the property as assessed by the provincial assessment authority to the current tax rates as stated by the local tax authority. The amount can differ each year but generally Property Tax falls between 0.5-2.5% of the home’s market value.

Other Expenses

Realtor’s Fees are paid by the vendor and are negotiable between 3 and 7% of the home’s market value. As a rule of thumb, Realtors often charge 7% on the first $100,000 of the sale price and 3% on the remainder. GST of 12% is also applied to the Realtor’s commission and is payable by the vendor.

Appraisal Fee Your lender may require a property appraisal at your expense. The cost is between $150-$350.

Survey Fee Your lender will require an up-to-date survey. If the Seller does not have one, you will have to pay to have one done. This can be approximately $150-$450.

Lawyer’s Fees Lawyers review the Offer to Purchase, search the title, draw up mortgage documents and tend to the closing details. The fee will be approximately $700-$1000. This amount varies between Provinces depending on the complexity of the sale and the type of property.

Home Inspection Fee is usually around $350-550. This is the equivalent of a survey in the UK and other countries and is carried out at the purchaser’s request.

Property Insurance which covers the replacement value of the structure of your home and its contents.

Service Charges can be in the region of $35-$50 to hook up new services and utilities.

Condominium (Strata) Fees are charged monthly and cover building insurance and maintenance. The building’s property manager will provide you with the fee.  For a newly built condo worth $250,000, expect to pay approximately $200 per month (this varies from building to building).

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

Procedures concerning the disposition of taxable Canadian property by non-residents of
Canada – Section 116.

Deductibility of Fines or Penalties: http://www.cra-arc.gc.ca/E/pub/tp/it104r3/it104r3-e.pdf.

Income Tax Interpretation Bulletins and Technical News.