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Income tax — sale of rental property by non-resident

My clients, a married couple, had been Canadian-resident but moved to the US in 1999. They bought a vacation home in Canada in 2010 and used it for some years, but then decided to rent it out.

Eventually they decided to sell the home. They had a loss on the sale, as its value had not increased from what they paid to buy it and perform capital improvements.

Since the sellers were non-resident, the buyer was required to withhold a percentage of the purchase price and send it to CRA, unless the sellers obtained a “section 116 certificate” from CRA confirming that any tax on the capital gain had been paid.

As is common practice among real estate lawyers, the sellers’ lawyer undertook to the buyers to hold in her trust account 25% of the sale price pending obtaining the certificate. The sale closed on that basis.

Unfortunately, the sellers took a long time to track down records of their capital improvement costs, and did not apply to CRA for a certificate for over a year.

CRA’s Non-Resident Dispositions section refused to issue a certificate because the application was late (it’s supposed to be sent no later than 10 days after the sale). Then CRA demanded that the buyers pay 50% (not 25%) of the purchase price as required by section 116, because the property was a rental property and thus “depreciable property” (on which capital cost allowance might have been claimed). The buyers’ lawyer contacted the sellers’ lawyer, who came to me for help. Meanwhile the seller’s lawyer still had the funds in her trust account.

I wrote to and spoke with the Non-Resident Dispositions official to resolve the matter. Technically she was right that the withholding obligation was 50%. I arranged for the seller’s lawyer to send CRA the funds she held in trust, so that 25% had been paid. I filed T1 returns for the sellers showing the disposition and that they had no capital gain and no tax payable, so all of the 25% paid could be refunded to them. Then I convinced the CRA officer to refrain from seeking the remaining 25% from the buyer, who understandably would not want to pay out an additional $340,000 two years after the closing (even though the buyer was legally liable to pay this amount).

Given that no tax was actually payable, the CRA officer agreed to drop the matter (despite the legal requirement to pay 50%), and simply process the T1 returns, giving credit to the sellers for the 25% that had been remitted.

Problem solved!

(2023)