If you're a member working with non-resident sellers, it's essential to understand that the sale of their property may be subject to a Canadian non-resident withholding tax based on the property's sale price. 

The Canada Revenue Agency (CRA) currently requires purchasers, through their real estate lawyers, to withhold 25% of the sale price as security. This withholding rate is designed to approximate the combined federal and provincial tax owed on capital gains (Department of Finance).

Important update: Due to recent adjustments in capital gains inclusion rates, the withholding tax rate for non-residents selling taxable Canadian property will increase. Starting January 1, 2025, the minimum withholding requirement will rise to 35% of the sale price. 

Non-resident refresh 

Non-resident sellers must apply to the CRA for a Certificate of Compliance, which confirms that the government has received the necessary funds or security to cover the tax on the gain from the sale. Obtaining this certificate can take anywhere from a few weeks to several months, so it is advisable for non-residents to consult their accountants early in the process to avoid delays in closing. 

Once the seller has received their Certificate of Compliance, the buyers should provide it to their lawyer. If the buyer's lawyer does not have a copy of the certificate at the time of closing, the buyer is required to withhold 25% (soon to be 35%) of the sale price until the certificate is received. The lawyers will hold this withheld money in trust until it can be released. 

What’s at stake? 

If the seller’s agent is unaware that the seller is a non-resident, it can be challenging to provide the appropriate guidance for a smooth and transparent transaction. Here are some potential complications: 

• If the sellers do not have the Certificate of Compliance by closing, the withheld funds will be based on the entire sale price, which could result in a short sale. 
• The withholding is a legal requirement under the Income Tax Act, and sellers and buyers cannot negotiate or waive it in the purchase contract. 
• In a short sale situation, the seller must find the funds to cover the gap; failure to do so could delay closing. 
• Remember that several parties are paid from the sale proceeds before the agent, so not identifying a seller as a non-resident risks compensation for the seller’s agent. 
• If a transaction closes without sufficient funds to compensate the REALTOR^®, the seller’s brokerage must ensure the buyer’s brokerage is paid, as per CREB^® Rule Part II Section 14. 

If the buyer’s agent is unaware that the seller is a non-resident and does not take appropriate steps to verify this, and if the deal closes without a Certificate of Compliance, the Income Tax Act allows the government to hold the buyer responsible for the tax on behalf of the seller. 

Avoiding stressful situations 

Agents representing sellers should highlight the warranties and representations outlined in the listing contract. This section clarifies that the seller is not a non-resident under the Income Tax Act. If the seller is unsure of their status, they should consult their accounting professional and provide a written response. 

If there is uncertainty about whether the seller is a non-resident when negotiating an offer, the seller’s agent should amend the Purchase Contract to inform the buyer and their agent about the potential for non-resident withholding. Agents drafting terms concerning a seller's non-resident status should seek legal advice. 

If the seller's agent knows their client is a non-resident, they must make the necessary amendments to the purchase agreement, referring to note 6.1(b) in the Residential Purchase Agreement.