I have been asked for answers on Canadian non-residents disposing real property. What’s the tax implication? Well, nothing is more complex than tax in Canada. Particularly, non-resident tax. I will try to explain more in details here.
Generally, Canadian income received by a non-resident is subject to two different types of income tax: Part XIII tax or Part I tax.
Part XIII tax is deducted from the income more or less like passive income received by non-residents. They are listed as follows:
- dividends;
- rental and royalty payments;
- pension payments;
- old age security pension;
- Canada Pension Plan and Quebec Pension Plan benefits;
- retiring allowances;
- registered retirement savings plan payments;
- registered retirement income fund payments;
- annuity payments, etc.
Remember, the Part XIII tax deducted is the final tax obligation to Canada on the above income and not refundable. The usual Part XIII tax rate is 25%. Part I tax is different and that’s what I am going to address the question at the beginning. The Part I tax applies to the followings:
- income from employment in Canada or from a business carried on in Canada;
- employment income from a Canadian resident for your employment in another country if;
- certain income from employment outside Canada, if you were a resident of Canada when the duties were performed;
- taxable part of Canadian scholarships, fellowships, bursaries, and research grants;
- taxable capital gains from Disposing of certain Canadian property; and
- income from providing services in Canada other than in the course of regular and continuous employment.
Obviously, you can see disposing of certain Canadian property is what the Part I tax will cover. Here I assume there is no principal residence exemption is available for the sake of discussion.
When a non-resident disposed certain Canadian property, generally, the process consists of three main activities:
- Non-resident vendor required(recommended)to notify the Canada Revenue Agency of the disposition. Alternatively, the non-resident could choose not to but the lawyer should be able to remind that. Even worse, by not notifying the CRA, it may come up with other issues and ruin the deal. Who likes to see that happens?
- Remit the security-resident vendor may be required to remit a 25% of the purchase price to the CRA. Such remittance is credited toward the vendor’s Canadian tax liability. Alternatively, vendor can elect to remit the security on a net base instead of gross basis. Please read my previous blog.
- Tax Return Filing. The non-resident may be obligated to file a Canadian income tax return for the tax year in which the disposition occurred payments, excluding penalties and interest are remitted to the CRA as a result of a disposition are considered interim payments.
Why filing a Canadian tax return? Because you may be able to get back a Part I tax refund. Yes , a refund! Here is why.
When non-resident files a Canadian tax return, he or she may be eligible for non-refundable tax credits like us, regular taxpayers in Canada. However, this is subject to the percentage of net world income. If the percentage is 90% or more, all the non-refundable tax credits that apply to you are allowed.If the result is less than 90%, only the non-refundable tax credits on disability tax credit, interest on student loan, the tuition amounts and donation credits are available. The total allowable amount of non-refundable tax credits will be the total of these credits multiplied by the rate of 15%. So, if you are eligible for those non-refundable tax credits, then you are not too far from getting the refund.
Secondly, Canadian taxpayers(individuals)pay taxes at graduated rates. What it means that the security remitted to the CRA may be excessive based on your net position of the disposition and the available non-refundable tax credits. As a result, non-residents are recommended to make a final settlement of tax for the disposition with the CRA when filing the tax return.
Don’t miss the refund.
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