Tax Considerations for Non-Residents Owning Canadian Real Property

Many individuals living outside of Canada, including former Canadian residents and individuals who have never resided in Canada, consider purchasing Canadian real property in the form of homes or seasonal residences. Some former Canadian residents also continue to own real property in Canada after becoming non-residents, either for investment purposes, or so they will have a home to move back to if they choose to return to Canada. Whatever the reason is for owning Canadian real property as a non-resident, there are a myriad of tax considerations that should be considered. Too many times, individuals owning Canadian real property as non-residents do not handle things properly, resulting in significant exposure to Canadian tax.

Canadian Real Property and Canadian Residency for Tax Purposes

It is a common misconception that the mere ownership of real property in Canada causes one to be viewed as a Canadian resident for tax purposes by the Canada Revenue Agency (CRA). Although the ownership of Canadian real property could be seen as a significant residential tie to Canada, there are steps that can be taken to mitigate this.

For example, the real property could be rented to an arm's length party at fair market value, preferably under a long-term lease. By doing so, the CRA should not view this as a significant residential tie to Canada when making a residency determination. On the other hand, leaving a vacant home in Canada available for regular and continuous use could send the message to CRA that an individual may be a resident of Canada for tax purposes. As well, renting the home to family members, or simply allowing family members to use the home rent-free is likely to send a similar message to CRA. If an individual is found to be a resident of Canada for tax purposes, he is taxed on his worldwide income, which could significantly increase his worldwide tax liability.

Principal Residence Exemption

For most Canadians departing Canada, the real property they own in Canada, up to the time of their departure, can often be designated as their principal residence. If the home is sold prior to leaving Canada, the full principal residence exemption should be available, with some exceptions, resulting in no tax on the sale of the home. Complexities of selling a home that formerly qualified as a principal residence arise when the property is sold by a non-resident of Canada. The reason for this is that the home cannot be designated as an individual's principal residence for the years that she is not a Canadian resident for tax purposes, with the exception of years where she was a Canadian resident for tax purposes for at least part of the year. The result of this is that the principal residence exemption will not fully offset the capital gain on the sale of the property, and a taxable gain may arise in Canada.

Change in Use Rules

At the time rental activity commences with a former personal use property, there is a deemed "change in use" of the home from personal use property to an income producing property under Canadian tax legislation. This may result in a capital gain, which will often be offset by the principal residence exemption. However, there is an election that can be filed at the time the rental activity commences that allows an individual to take advantage of the principal residence exemption, potentially to reduce a future capital gain on the sale of the property. In some cases, this can be of benefit if the home is expected to increase in value for the years that the individual owner is a non-resident of Canada. Alternatively, if the property is not expected to increase in value while the individual owner is a non-resident of Canada, the election may not be beneficial. There are many other complexities involved in the decision of whether or not to file the election, which a tax professional should advise on.

Earning Rental Income in Canada

If the home is rented while an individual is abroad, the rental income is often large enough to cover most of the expenses incurred on the home, which can be a significant benefit. The common expenditures involved in maintaining a home are property taxes, mortgage interest, utilities, property management fees, and repairs and maintenance. It will be necessary to track and keep proper documentation to support these and other expenses incurred to earn the rental income.

Although there could be a capital gain on the eventual sale of the property, the home is being looked after and operating virtually at no cost to the homeowner while the owner is living abroad. The individual has the benefit of renting the home with little to no tax, depending on the net income of the property being rented. If the home is then reoccupied on a future return to Canada, the longer the individual lives in the home, assuming the proper tax election is filed, the lower the capital gain on eventual sale.

Not surprisingly, there are withholding tax and annual non-resident rental filing requirements that individuals must comply with if they own real property in Canada as a non-resident and earn rental income from it. If these requirements are not properly met, there could be significant interest and/or penalties imposed by the CRA for non-compliance. Additional filing requirements and capital gains tax may result when the property is disposed of, even if the property is not being used as a rental property.

Unfortunately, many Canadian expatriates rent their homes, but do not properly abide by the tax withholding and/or tax filing requirements, because they are not aware that these rules exist. A detailed review of the filing and withholding requirements are beyond the scope of this article. However, you should at least be aware that income from the rental of Canadian real property is taxable in Canada, even if you are a non-resident of Canada for tax purposes, so you should ensure that the tax filing and remittance requirements are met.

Tax on Sale of the Property

If the Canadian real property is sold while the individual is a non-resident of Canada, there may be tax owing as a result of the disposition. However, whether there is tax on the sale or not, the individual must meet certain filing and remittance requirements. The non-resident vendor must file a special form and remit the appropriate amount of tax to the CRA. (If these requirements are not met, the purchaser may be required to remit the tax based on the total purchase price, which can severely affect an individual's cash flow.) The non-resident vendor must send the form to the CRA no later than 10 days after the date of sale. Once the CRA receives the form and the remittance, they will issue a clearance certificate to the purchaser as proof that the non-resident vendor has met the necessary requirements. The non-resident vendor is still required to file a Canadian non-resident income tax return to report the resulting gain or loss. A tax refund may arise because the overall Canadian tax rate will often be less than the required tax remittance. In addition, the selling costs are not taken into account when the original tax remittance amount is determined, which will usually further reduce the overall tax.

If the property is sold after the individual re-establishes Canadian residency, tax may still result on the sale, though the filing and withholding requirements are less onerous.

In summary, owning a property as a non-resident requires some foresight. It could be seen as a primary residential tie if it is not rented to an unrelated individual/party at market value, so this should be considered. There are also considerations around the change in use from a personal use property to an income producing property, and possibly back to a personal use property if the individual returns to reoccupy it. Finally, there are tax withholding and tax reporting requirements on the rental income, as well as issues around the sale of the property, both as a resident and as a non-resident. These issues, and others that cannot be covered in this article, should be considered when an individual becomes a non-resident of Canada for tax purposes, because ignorance could result in a significant tax cost. As always, professional tax advice in dealing with these complex issues is a must.

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