Understanding TAXABLE CANADIAN PROPERTY

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For non-residents investing in Canada, contact our law firm at Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

Taxable Canadian Property is a specific class of asset defined under the Income Tax Act (Canada) whose disposition by a non-resident of Canada subjects the resulting capital gain to Canadian income tax. Unlike residents, non-residents are generally only taxed on income sourced in Canada, and the disposition of property other than Taxable Canadian Property is typically not taxable in the country. The policy rationale behind the Taxable Canadian Property rules is to ensure that Canada retains the right to tax gains realized on assets strongly connected to its economy and physical location, most notably real estate and natural resources. The designation of a property as Taxable Canadian Property triggers stringent reporting and withholding obligations, codified primarily under Section 116 of the Income Tax Act, which is designed to secure the eventual tax payment due from the non-resident seller.

The definition of Taxable Canadian Property encompasses several categories of property, with real or immovable property situated in Canada being the most straightforward and common example, such as land, buildings, and rental properties. Beyond physical real estate, the definition extends to certain non-real estate interests that derive their value predominantly from Canadian resource assets or real property. Specifically, shares of a private corporation, an interest in a partnership, or an interest in a trust are considered Taxable Canadian Property if, at any time in the 60 months (five years) preceding the disposition, more than 50% of the fair market value of the share or interest was derived, directly or indirectly, from a combination of Canadian real property, resource property, or timber resource property. For publicly traded shares, a similar 50% asset test applies, along with an additional requirement that the non-resident, or persons not dealing at arm's length with them, owned 25% or more of the shares.

The primary consequence of disposing of Taxable Canadian Property is the obligation to notify the Canada Revenue Agency (CRA) via Form T2062 (or T2062A for depreciable property) and pay a prepayment of tax. The non-resident vendor must file this notice generally within 10 days of the disposition or proposed disposition. This application is crucial because it allows the non-resident to obtain a Certificate of Compliance (or "clearance certificate") from the CRA. Without this certificate, the buyer is required under Section 116 to withhold a percentage of the gross sale proceeds, typically 25% (or 50% for certain depreciable property), and remit it directly to the CRA, regardless of the vendor’s actual gain.

The clearance certificate mechanism serves to protect both the Canadian revenue base and the purchaser. Once the CRA issues the certificate, it limits the buyer's statutory withholding liability to a percentage (usually 25%) of the estimated capital gain (proceeds minus adjusted cost base, or ACB), rather than the gross proceeds, or fixes the amount of tax that needs to be withheld and remitted. This allows the non-resident vendor to receive a larger portion of the sale proceeds upon closing. The purchaser insists on the certificate because, in its absence, the purchaser is jointly and severally liable with the vendor for the non-resident’s tax liability up to the full withholding amount. This buyer liability is a powerful enforcement tool for the CRA.

Following the transaction, the non-resident must file a regular Canadian income tax return (T1 for individuals, T2 for corporations) for the year of disposition by the standard filing deadline (April 30 for individuals). This final return reports the disposition, calculates the actual tax liability based on the net capital gain (including deductions for selling costs not accounted for in the initial certificate application), and applies the amounts remitted via the withholding tax or prepayment as a credit. If the tax withheld or prepaid exceeds the actual tax owing, the non-resident receives a refund. Tax treaties can sometimes exempt certain types of Taxable Canadian Property from Canadian tax, but generally, tax on real property gains remains taxable in Canada.

For knowledgeable and experienced tax, investment and corporate law representation for non-residents looking to invest in Canada, whether through active business enterprises, passive income investments or real estate investments, we welcome you to contact our law firm for strategic legal advice to optimize your commercial interests in Canada at Chris@NeufeldLegal.com or call 403-400-4092 / 905-616-8864.

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