Introduction to Toronto Real Estate Taxation for Non-Residents

September 22, 2011

The subject of real estate taxation can often be overwhelmingly complicated for those that are new to the field. That’s why it’s imperative that you first gain a foundation understanding of the central taxation components involved in the buying and selling of property before you enter into a transaction. Within this article, we’ll review the steps non-residents can take in order to avoid losing a large percentage of their sale profit to Toronto land transfer taxes.

 Let’ Review the Numbers

If you are a non-resident of Canada looking to sell real estate within the country there are some potential implications that you might wish to review before proceeding with the sale. Non-residents must pay 25% for the gross selling price of their property to the Canada Revenue Agency (CRA). Let’s say for example that you had a property that was worth $400,000; in this case, the amount of tax due to be paid to the CRA for the property would be $100,000. Often, this can make investing within Canadian real estate to be too expensive to those who do not have a residence within the country. However, there are ways in which to limit the amount of money paid by those who are committed to selling their property within Canada.

By following specific real estate sale procedures set out by the CRA, the 25% tax on the gross selling price for the property can be reduced to 25% tax on the overall capital gains (profit) from the transaction. So now, going back to our previous example of a $400,000 home, the tax level would be based on how much you paid for that original property. If you bought it for $300,000 and solid it for $400,000, you would only pay tax on the $100,000 profit that you made in the deal, therefore your tax exposure would be limited to $25,000.

So now you might be saying to yourself “Sounds great! But how do I achieve this reduced rate.”

In order for a non-resident to achieve this reduced tax rate, they must first apply for a Clearance Certificate (form T2062.) When submitting this document, the seller must first remit the CRA the full 25% on the gross sale price of the property. This often causes a problem for the seller as they may not have the funds to pay the full 25% on the gross sale price. Therefore, in order to counteract this difficulty, non-residents applying for the Clearance Certificate must attach a letter to the application requesting that CRA seek to obtain the 25% gross from the buyer of the property. This makes the buyer liable for the full tax amount.

In this situation, the buyer and the non-resident seller must come to an agreement in which that 25% of the gross sale price is withheld by the buyer or the buyer’s legal representation Then, once the Clearance Certificate is issued, the purchaser will release that 25% of the purchase price to the Canada revenue agency and the difference between the 25% of the purchase price and the 25% tax on the capital gains will be provided to the non-resident seller by the CRA,  allowing the non-resident seller to realize a substantial tax savings on their property sale.

By following all legal rules to the letter and ensuring that all parties are kept up to date with the sale and form filing process, non-residents can ensure that they achieve a successful and profitable Canadian real estate sale

If you have any questions in regards to the taxes in Toronto area, please fill out the form bellow – I respond to ALL inquiries!

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