How does Canada Enforce its Right to Tax US citizens?
The Canadian Income Tax Act contains rules which are intended to ensure
compliance by non-residents who dispose of taxable Canadian property.
These rules potentially shift the vendor's tax burden to the purchaser
by imposing a withholding obligation on the purchaser based on the gross
purchase price payable for the taxable Canadian property. The non-resident
vendor must then apply for a Clearance Certificate to reduce the withholdings
and ultimately file an income tax return to obtain credit for any costs
(legal fees, etc.) associated with the sale.
Generally, any person (including another non-resident) who is purchasing
a taxable Canadian property from a non-resident is required to withhold
33 1/3% of the gross purchase price and remit this to the Canadian government
in respect of the non-resident vendors tax liability. The vendor may
apply for a Clearance Certificate in advance of the closing date, which
would permit the purchaser's withholdings to be based upon 33 1/3% of
the vendor's estimated capital gains (determined before commissions and
other costs of sale).
If the sale of taxable Canadian property is not reported in advance
of the transaction, the non-resident vendor is required to notify the
Tax Department, by registered mail, within ten days after the date of
sale. This notice will usually be made in the form of a Clearance Certificate
application (form T2062). In these "post-closing" Clearance Certificate
applications, the purchaser withholds on closing 33 1/3% of the gross
purchase price and then releases to the vendor any excess of the amount
withheld over the "Certificate Amount" (being one-third of the vendor's
estimated gain before selling expenses). A six- to ten-week delay in
processing Clearance Certificates is not unusual.
In computing the estimated capital gain on form T2062, outlays and expenses
related to the sale, including real estate commissions and legal fees
may not be claimed. These amounts may be claimed when the non-resident
vendor files a Canadian income tax return for the calendar year that
includes the disposition date. These filings generally result in a refund
of tax to the non-resident vendors. Generally, the Canadian income tax
return for an individual is due April 30th of the following year. Unlike
the United States, extensions to file returns are not available. Late-filed
returns are subject to penalties and interest on any amount unpaid by
the filing deadline.
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