Selling Canadian Real Estate as a Non-Resident of Canada

In my previous blog, (https://mcacrossborder.com/renting-out-your-property-as-a-non-resident-of-canada), I discussed the tax compliance rules around renting out your property in Canada as a non-resident. In this blog, I would like to continue this discussion by explaining the tax compliance rules around selling your Canadian property as a non-resident of Canada and the options available to you in your year of departure from Canada.

Tax Planning Option for the year of Departure

When you cease to be a resident of Canada, any real estate property you hold in Canada, be it a primary residence or a rental property, is excluded from the deemed disposition of your assets (otherwise known as “departure tax”). This means that if you choose to do nothing, there is no tax event with respect to any Canadian real estate property upon your exit, and the original cost basis for Canadian tax purposes is retained.

If you choose to hold the property after exiting Canada but are unsure about when you may sell it in the future, you have the option of triggering a capital gain (or loss as the case may be) on the property upon your exit by filing a CRA election on form T2061A.

For your primary residence, any potential capital gains tax can be eliminated or reduced by claiming the Principal Residence Exemption (PRE) which allows you to exempt part or all of the taxable gain.

It’s worth noting that you can only claim the PRE for your years of ownership while you were a Canadian resident, but the formula does allow an extra year of exemption for added flexibility. This means that if you depart Canada, you can sell the property within a year of your exit and still benefit from the same level of exemption (providing you were a resident of Canada when you initially bought the property).

If it’s a rental property, which wouldn’t be eligible for the PRE for periods of rental, triggering a capital loss could be advantageous to offset other taxable capital gains that may arise from the deemed disposition at departure.

Once the T2061A form has been filed with the departure tax return, the cost basis of the property will be reset to the fair market value on the date you ceased to be a resident of Canada. This strategy may allow you to minimize the future capital gains tax when you eventually sell the property. 

Which of the 2 routes is best to pursue, either 1) maintaining the original cost basis, or 2) filing form T2061A to trigger the tax event, is not a one size fits all decision, and needs to be evaluated by your cross-border financial planner / tax advisor on a case by case basis to determine which is optimal based on your particular facts and circumstances.

Selling the Property as a Non-Resident of Canada

Suppose you decide to sell the property after several years and are still a non-resident of Canada at the time of sale. You must inform the CRA (and Revenue Quebec if the property is located in Quebec) either before the closing date or within 10 calendar days (not business days) following the closing date by filing forms T2062 and T2062A (for a rental property). Owners of property in Quebec must also file a TP1097 form with Revenue Quebec. 

CRA and Revenue Quebec want to ensure that you have sufficient funds to cover any capital gains tax owing on the sale in case you do not comply with the required tax filing.

Therefore, both CRA and Revenue Quebec require the purchaser/lawyer to withhold 25% (or 37.876% for Quebec) tax of the gross sale price.  This process involves a mandatory application for a “Certificate of Compliance,” by which you/your lawyer must withhold 25% (or 37.876%) in withholding tax to CRA (and Revenue Quebec if applicable). With varying processing times, it might take anywhere from 4 to 6 months (or more) for CRA and Revenue Quebec to issue the Certificate of Compliance.

After the Certificate of Compliance has been issued, your purchaser/lawyer can release any excess withholding back to you (gross 25% withholding minus the net tax liability calculated by CRA / Revenue Quebec). However, this is not the final tax owed; you should file a Canadian tax return, which allows you to claim any selling outlays and pay any tax owing at your effective Canadian tax rate, which may be less than 25%.

As mentioned, the capital gains tax can be reduced or eliminated by claiming the PRE for those years of ownership that meet the criteria for the exemption for when you lived in Canada. To claim the PRE, Form T2091 must be sent along with Forms T2062 and T2062A to CRA (same for revenue Quebec).  It is important to be aware that you may be subject to a penalty of up to $2,500 if you don’t file Form T2062 on time.

Due to the new capital gains tax rate as of June 25, 2024, it’s important to have a plan in place before deciding whether to sell the property. Additionally, a significant amount of tax would be withheld for several months, so it is important to consult with a cross-border financial planner / cross-border tax advisor to help optimize your cash flow by comparing the various tax strategies available to you.