We work closely with Yetman Law and BDO to provide our non-resident buyers and sellers with accurate advice in their real estate transactions and ongoing usage of their properties.
EXECUTION OF MORTGAGE DOCUMENTS
Once the borrower has signed a commitment letter with the lender, the lender will instruct a lawyer or notary to draw the mortgage security. These documents must be couriered to the borrower for their execution in the presence of a notary public. First you must confirm with your lending institution that a notary can witness the documents, some banks or lending institutions require you to do it in person in the bank in Whistler. What this means to the buyer is simply that sufficient time must be allowed to courier the documents. Faxes and other methods of transmission are not possible in this case.
METHODS OF PAYMENT
It is recommended that the purchaser open a bank account in Whistler for the transfer of funds. The balance of the purchase price must be paid by certified cheque or bank draft in Canadian funds. Since exchange rates fluctuate from institution to institution, from day to day, and depending on the amount to be exchanged, it is important to research this before the completion date.
COMPLETING THE TRANSACTION
It is critical to complete transactions on the designated completion date in British Columbia. As with mortgage documents, some lending institutions require you to sign the transfer documents in person with your Canadian lawyer. The vendor has the option of cancelling the contract of Purchase and Sale should the funds not be paid on the stipulated completion date, and, in this case, they are entitled to retain the deposit. It is not uncommon for vendors who wish to continue with the transaction to demand interest or additional charges for extensions for late completion.
REQUIRED DOWN PAYMENTS FOR A CANADIAN MORTGAGE
- For the first $400,000, a down payment of 35% is required.
- For the next 300,000, a down payment of 45% is required.
- For the remainder, a down payment of 50% is required.
An example: If the purchase price is $800,000 the maximum mortgage allowed is $475,000.
WHO ADMINISTERS CANADIAN INCOME TAX?
Non-residents who earn income in Canada from properties they own in Canada are subject to tax by the Canadian Revenue Agency (CRA). Income tax is calculated separately from other taxes, such as municipal or local government taxes, and may be based on gross or net rental income for the taxation year. The taxation year for individuals and certain other entities begins January 1st and ends December 31st. For corporations, it is their regular fiscal year-end.
HOW MUCH INCOME TAX?
Income tax or income from property is first collected at the source of payment. The CRA requires persons or businesses paying such income to non-residents to withhold and remit 25% of the gross income from property (before deductions). The amount of tax withheld is indicated on the NR4 form, which is prepared by the person or business that withheld the tax. This withholding is a sort of prepayment of income taxes and normally will exceed the actual income tax liability. However, the CRA will keep the full amount of prepaid taxes unless the non-resident files the appropriate Canadian income tax return by the due date.
The actual income tax is determined when the income tax return is filed and assessed by the CRA. Income tax is paid only on the net income from a property, which is the total income less allowable deductions, including depreciation. The rate of income tax can vary, but is a minimum of 20% for individuals and 31% for corporations.
CAN WITHHOLDING TAX BE REDUCED?
The tax withheld at source can be reduced if the non-resident and an agent acting of their behalf (normally the property manager) jointly sign and file an NR6 election form (rental income property), or if a regulation 805 waiver form is filed for your property (business income property), and the CRA approval is obtained. These forms should be files as soon as your purchase a property from which you intend to earn income, and before the beginning of each taxation year thereafter.
The NR6 form is an undertaking by the non-resident to file the appropriate Canadian income tax return, referred to as a Section 216 election or return, by the due date. It reduces your withholding tax to 25% of net income after deducting your expenses.
The 805 waiver is a “comfort letter” for the property manager, which affirms that the CRA will not require them to withhold 25% of gross income, as the taxpayer is earning business income from a permanent establishment in Canada, and is required to file the appropriate income tax return to report that income and pay and required tax by the due dates.
WHEN ARE THE INCOME TAX RETURNS DUE?
If an NR6 form has been approved by the CRA, your Section 216 income tax return must be mailed to the CRA by June 30. A late return will not be accepted and your final tax liability will be 25% of the gross income from the property tax year. The CRA can collect this tax, plus interest, in a later year when you sell the property. If an NR6 was not filed, you have the option to file a Section 216 return within two years from the end of the taxation year to obtain a refund of withholding tax paid. If you do not file within two years, the CRA will normally keep the withholding tax paid.
If you earn business income to which a Regulation 805 waiver form applies, your income tax return must be mailed to the CRA by June 15th, whether or not the 805 waiver has been completed. Returns that are filed late will be subject to penalties and interest, and may result in the CRA denying the approval of future 805 waiver applications.
GOODS AND SERVICES TAX (GST)
The GST is a 5% tax that is charged on most goods and services, including short-term rental accommodation, and operates much like other value added taxes (VAT) in other countries. If you are earning short-term (nightly) rental income from your property, you may be eligible to register for GST purposes and claim a refund or defer payment of GST on expenditures related to your rental property. This includes GST payable on the purchase of your property. If you intend to enjoy your property for personal use, whether occasionally or frequently, your eligibility may be reduced or eliminated.
Your GST returns are often prepared at the same time as the income tax returns but generally have an earlier due date. Check your information carefully to ensure that you know when your GST return must be filed. Information required to prepare your GST return is the same as for the income tax returns.
Checklist of general information required to prepare your Canadian income tax and GST returns:
- Revenue and expense statement from property manager
- GST collected, if applicable
- Expenses paid to earn income from property
- Property management fees
- Tourism Whistler dues (if property is in Whistler)
- Insurance fees
- Strata fees
- Accounting fees
- Mortgage interest
- Repairs and maintenance
- Property taxes paid
- NR4 slip prepared by property manager
- Number of days your rental property was used for personal purposes
WHAT HAPPENS WHEN THE PROPERTY IS SOLD?
When real estate situated in Canada is sold by a non-resident, Canadian income taxes will be payable if the selling price is greater than the original cost of the property. A “pre-payment” of 25% of your total capital gain is calculated and submitted with the T2062 form, “Request by a Non-Resident of Canada for Certificate of Compliance Related to the Disposition of Taxable Canadian Property,” to the CRA and must be filed within ten days of the disposition, but preferably sooner. Legal counsel is required to holdback between 25 and 50% of your sales proceeds, in trust, until the CRA has processed the T2062 application for and received the required payment. You may need to plan for this delay in cash flow, particularly if you have a mortgage to retire or other financial commitments.
The CRA will require documentation at the time of the sale to support the cost of the property being sold. It is important that such documents be kept on file to avoid unnecessary income taxes on capital gains.Documentation required includes:
- Property purchase documents, usually “Purchaser or Buyer Statement of Adjustments,” and/or assignment documents
- Invoices for all capital type items or improvements that will be sold with the property
- Canadian Customs documentations for goods imported into Canada, which should be requested from Canadian Customs at the time the goods are imported.
- If you intend to furnish your property with items from a home outside Canada it is important to contact Canada Customs in order to find out what their requirements are with respect to avoiding duties on these items.
- Generally, you are permitted one shipment of used personal effects to a recreational residence without being required to pay duty.
- You will be required to show a Form A Transfer form to prove that the items are being brought in to furnish your property. A copy of the form can be obtained from your lawyer.
RECEIPTS FOR FURNISHINGS
- If you are purchasing furnishings for your property and intend for those furnishings to be sold with the property, it is important to retain receipts for the furnishings and show evidence that the furnishings are staying with the property.
- This evidence should include documentation from Canada Customs if the furnishings were brought across the border, or invoices showing delivery of the items to the Whistler address if they were purchased somewhere other than Whistler.
- If receipts and other evidence are not retained, CCRA will disallow the deduction of the cost of the furnishings from the sale of the property, increasing the tax payable on a transfer of the property.
* This information has been provided by BDO and Yetman Law, and is for guideline purposes only. If you have any detailed questions please contact us and we will set you up with a trusted adviser.