Under the current Canadian law, the buyer is obligated to withhold 25% of sale price of the real property if the seller is a non-resident. The buyer’s lawyer usually holds the money in his/her trust account.
Withholding 25% of sale price presents a huge financial challenge to the seller because it means less money available for immediate re-investment, lost opportunity for another real property investment, or lost interest. For example, a sale of 2 million house will require the withholding tax of $500,000.
How soon can the seller obtain his money back?
In order to release the withholding money from the buyer’s lawyer, Clearance Certificate or Certificate of Compliance under Section 116 is required.
What is the Clearance Certificate under Section 116?
Clearance Certificate is the documentation from CRA to certify the necessary tax has been paid, which then allow the buyer’s lawyer to release the funds to the seller.
Does the seller has to pay another withholding tax when applying the Clearance Certificate?
The application requires payment of tax based on 25% of the net profit of the sale. Since the tax payable takes into account the purchase cost of the real property, it will be substantially reduced. Most importantly, the seller can ask the buyer’s lawyer to pay for the tax from his/her trust account.
How long it take to get the clearance certificate?
From our experience applying the clearance certificate, it may take up to two months to six months. CRA may come back to ask for additional documents. PNC Consulting aims at providing all the required documents at outset and so, cut back on turnaround time in CRA’s enquires. With this mind, PNC Consulting may get Clearance Certificate in two months’ time.
Centre of Expertise for Section 116
CRA has established a section 116 Non-resident Disposition Centre of Expertise (COE) for Pacific Region. The new COE is located in the Vancouver Tax Service Office. All applications are to be sent to Canada Revenue Agency – section 116, PO Box 470 Stn Main, Surrey BC.