The standard Contract of Purchase and Sale of real property contains a clause where the Seller declares whether they are Residents of Canada or Non-Residents of Canada as defined under the Income Tax Act. The significance and importance of this clause should be reviewed:

If the Seller is a "non-resident", then the Seller must remit a tax of 25% of the increase in value of the property between the date of the acquisition and the selling date. This tax is based on a 50% inclusion rate. In computing this tax, no deduction may be made for the costs of disposition such as real estate commissions and legal fees. Some of the costs when a property was purchased by the Seller (e.g. Property purchase tax paid and legal fees) can be included in the acquisition value of the property.

If a non-resident Seller fails to remit the required tax, then the buyer may become liable to pay the tax on behalf of the seller.

When dealing with a "non-resident" Seller situation, you should request your Realtor to provide the lawyers with as much advance notice as possible. The Buyer's lawyer will require the Seller's lawyer to provide them with a clearance certificate issued by the tax department in order to protect the Buyer. The Seller's Lawyer usually asks an accountant to prepare the appropriate tax return and calculate the tax to be remitted. The Realtor can often assist the accountant by obtaining information, such as a copy of the Statement of Adjustments from the Seller when the property was acquired.

Although the tax department does not allow the Seller to claim some of the costs of the disposition (e.g. Real Estate commission) in the calculation of the 25%, it is possible in many cases for an accountant to prepare a further tax return after a later date taking into account these costs which often results in a refund of some of the taxes paid.
If the property being sold by the non-resident vendor was used for rental purposes, it will also be necessary to determine whether or not income tax returns reporting the rental income have been filed. If these returns were not filed, the accountant will have to correct this and usually results in some delay in processing the clearance certificate.
The foregoing information is of a general nature only. Please speak with a lawyer or accountant involved in the particular transaction you were involved with for more specific details.

This article has been provided by Mullin Demeo Barristers and Solicitors