Over the past two years, real estate prices have soared in many areas of the country, and increasing sales prices combined with the growing difficulty crossing the border due to the pandemic has led to a dramatic increase in non‑residents selling cottages, rental properties and commercial properties in Canada.
If you are a non‑resident who owns real property in Canada, you must follow a strict tax process if you are looking to sell. This process involves applying for a Certificate of Compliance related to the disposition of taxable Canadian property using form T2062. In simple terms, this is a withholding tax. Filing the T2062 results in a withholding tax of 25 per cent of the net capital gain of your property sale (proceeds less adjusted cost base). Not filing the T2062 results in a withholding tax of 25 per cent of the gross proceeds on the property. Note that, for real property in the province of Québec, an additional form (TP‑1097‑V) is required, and an additional withholding tax (12.875%) also applies.
In an earlier article1, Ben Berci outlines the technicalities of filing the T2062 form and a Canadian personal tax return (T1). With this article, we intend to highlight some nuances and general planning for future sales.
Professional advice
If you are a non‑resident looking to sell, the first step is ensuring you have all your property documentation in order, as well as an experienced Canadian lawyer and accountant to assist with the certificate of compliance process. Most of this work can be done beforehand to ensure there are no delays filing the application within 10 days of closing. If at all possible, you should file within the 10‑day filing deadline, as the late filing penalty is $25 a day, with a minimum of $100 and to a maximum of $2,500 per non‑resident owner.
Application for individual tax number (T1261)
As with any Canadian tax filing, the person filing the return (T2062 or T1) is required to have a Canadian tax identification number. If you do not have a social insurance number (SIN), temporary taxation number (TTN) or a previously issued individual tax number (ITN), you will need to apply for an ITN by filling out form T1261. This can be filed alongside your T2062 form.
This form requires a certified copy of your driver’s license, passport or another document with your name, date of birth and photograph. A certified copy must be certified by a professional such as a notary, lawyer, doctor or chartered professional accountant, verifying the document is a true copy of the original. The person certifying the copy of your identity document must include their official title, address and contact number.
Canadian income tax filings
The second consideration is whether all required Canadian income tax filings are up to date.
Rental income – If the property being disposed of is a rental property, there may be unreported rental income or recapture of capital cost allowance2. There is a question on the T2062 form that specifically asks if the property was rented or leased. Answering yes to this question without the proper tax filings for the rental income will delay the certificate of compliance process until the prior year’s tax filings are complete.
Previous change in ownership – With family cottages, ownership interests are often gifted within the family, either while the relative was still living or through their estate. If the property was originally gifted by a relative, it may be determined that there was an unreported disposition of the property in a prior year. It is prudent to review the family history of ownership of the property to determine its true cost base and if there are any unreported dispositions. The discovery of unreported rent or disposition should be reviewed with a Baker Tilly tax advisor to determine the best course of action to minimize penalties and interest and expedite the receipt of the certificate of compliance.
Adjusted cost basis
As noted above, the filing of the T2062 results in a withholding tax applied to the capital gain, which is the selling price less the adjusted cost base of the property. When determining the withholding tax, your selling costs (i.e., legal, accounting and real estate fees) are not a factor. These costs will ultimately reduce the capital gain reported on the T1 in the following year.
While determining the selling price is easy, determining the cost of the property may be more difficult. You can ensure you are reporting the maximum allowed cost base by reviewing the following:
- Capital asset additions and/or major renovations
- Additions and renovations can be added to the cost base on the sale (except chattels, such as appliances).
- You will generally need support for these additions by way of receipts, invoices and/or cancelled cheques.
- Certain exemptions can reduce the net capital gain
- Principal residence exemption (PRE) can be claimed if the non‑resident seller was a Canadian resident during some years of ownership and meets the PRE criteria. To claim the PRE, a designation using form T2091 must be completed with the T2062 filings.
- Fresh start rule – Article XIII, paragraph 9 of the Canada – United States Tax Convention will allow a reduction in the capital gain for properties owned on September 26, 1980 and disposed after December 31, 1984. To take advantage of this exemption, you will need the following:
- Proof you were a continuous resident of the U.S. from September 26, 1980 to the date of sale.
- Value of the property on December 31, 1971 (for property acquired before January 1, 1972) and
- An appraisal report for the value of the property on December 31, 1984 or
- A calculation of the exempt portion of the gain accrued to December 31, 1984.
Personal income taxes
After submitting the T2062 withholding tax form with the required tax, you will want to file a personal tax return in Canada. In most cases, the withholding tax exceeds the final tax owing on the sale. This is due to a combination of factors, including not being able to deduct legal, accounting, and real estate fees from the withholding taxes calculation, and because the withholding tax rate exceeds the effective tax rates on capital gains.
If you’re considering a sale, please contact your Baker Tilly advisor to determine what is needed in your specific circumstances.
- Non-residents and the sale of Canadian real estate property
- Form T2062A is required if any capital cost allowance was previously deducted
Related content
