Tax issues when buying Canadian real estate

U.S. residents often shocked by fees, red tape

It was a tweet that caught my eye.

Although I don’t know Robert Crowe, a Realtor with Re/Max Real Estate Services in Vancouver, he and I for some reason are Twitter buddies. Recently, he tweeted this: “Got an email from a U.S. client to sell a condo. Remember it takes up to 3 months for nonresidents to get a clearance certificate.”

I travel to Canada about two or three times a year and I always had this fantasy that I would buy a second-home condominium in a lovely mountain setting, in Canmore outside of Banff, or in Whistler, home to the 2010 Winter Olympics ski events.

I don’t suppose it will ever be more than a fantasy, but I keep an eye open just in case. That’s why Crowe’s tweet interested me. Was it more complicated for an American to buy real estate in Canada than it would be for an American to buy in the U.S.?

In a sense it is, because of tax issues. Any gain on the disposition of personal property in Canada is subject to taxation, which is levied in two parts: a withholding tax at the time of disposition and then a final calculation of tax as reported on the personal tax return.

The tax that trips everyone up, and the one Crowe cautioned readers about, is the withholding tax on the sale of property, which is a minimum 25 percent of the interim gain on the sale (based on selling price), and it’s paid by filing a form (T2062).

However, the folks at the Canada Revenue Agency are a suspicious group, very concerned that nonresidents may sell a property, take the proceeds out of Canada, and never pay any tax. Obviously, it would be difficult for the CRA to collect this tax from a nonresident who no longer has any assets in Canada.

The way the CRA enforces the collection of this tax is to transfer the obligation to pay the tax from the nonresident vendor to the purchaser of the property.

Unless the purchaser receives a signed declaration that the vendor is a resident of Canada or received a Certificate of Compliance, the purchaser will be liable for withholding tax at the rate of 25 percent of the selling price, and the purchaser’s lawyer must remit this withholding tax to CRA.

Obviously, the purchaser doesn’t want to be on the hook for this money, so the responsibility gets transferred back to the vendor.

“Our government wants to say, ‘Hey, if you bought a property up here and it has gone up in value, we want you to leave some tax money behind on the way out,’ ” Crowe said. “So, the government is going to require that you leave some money in a trust until all your taxes are filed and you paid enough. That’s a minimum 25 percent of the sale price of the property.”

Typically, the T2062 is filed when an offer on the property is made. However, you are dealing with a government bureaucracy, which might be even more inefficient than the Internal Revenue Service, and as Crowe points out, it takes as much as three months to get one of these pieces of paper.

So if I, as an American resident, bought a property in Vancouver for $300,000 and now want to sell it for $400,000, I would turn to Crowe, who would tell me he would list the property, but I pretty much have to have $100,000 (25 percent of $400,000) to be kept in a trust until a sale closes.

“We can close straight away on a sale, but the government is going to require your lawyer to hold back 25 percent of sale proceeds until you can prove how much of a capital gain you have made,” Crowe said. “If you don’t have $100,000, then the property can’t close until you get the Certificate of Clearance.”

The problem, Crowe added, is that a lot of nonresidents don’t find this out until they are about to close. “I had a situation recently where it came around to closing and the lawyer said, ‘You need to buck up $120,000.’ They had three days to get it,” said Crowe.

Do non-Canadian residents really and truly understand the expensive closing process in Canada? To find out, I checked-in with Sally Warner at Re/Max Sea to Sky Real Estate Whistler, who bills herself as Whistler’s No. 1 Re/Max agent.

In 2010, 8 percent of buyers in Whistler were Americans (Warner said about 5 percent of her clients in 2010 were Americans).

“Most of my American clients understand the process because I give them a document that discusses nonresidents buying in Canada,” Warner said. “I give it to them when they are buying, and I give it to them when they are selling. Most understand, but whether they all do, I’m not sure.”

In any case, she said, it doesn’t deter Americans from buying.

“Rather than grappling with Canadian documentation,” she said, “it’s easier to get someone else to do that for you, so I hook up clients with an accountant.”

Which is something else that Americans should know. They will need an accountant to get that Certificate of Clearance, and they need a lawyer, because there are no escrow companies in Canada. The lawyer will also do the closing documents.

The three most important things a non-Canadian should do before attempting to sell a condo in Whistler, Warner said:

1. Contact a Canadian accountant about the process of applying for a clearance certificate (Certificate of Compliance);

2. Find out what supporting documentation will be required so that it can be prepared and readied; and

3. Understand the lawyers will withhold 25 percent of the sales proceed until this certificate is acquired.

And oh, by the way, Warner also recommends working “with a good Realtor.”

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, “After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade,” has been ranked as a top-selling real estate investment book for the Amazon Kindle e-reader.