Section 116 of the Income Tax Act plays a significant role in regulating real estate transactions in Canada. This provision is crucial for both residents and non-residents involved in buying or selling Canadian real estate. In this blog, we will explore the intricacies of Section 116 and understand how it affects various aspects of real estate transactions.
Understanding Section 116
Section 116 of the Income Tax Act is designed to ensure that non-residents who dispose of certain Canadian properties pay the appropriate amount of tax on any gains they make. It is especially relevant when a non-resident sells Canadian real estate, as the government wants to ensure that tax is collected on any capital gains earned during the transaction.
Key Components of Section 116
1. Non-Resident Sellers: Section 116 primarily applies to non-resident individuals or corporations. If you are a Canadian resident, you are generally not subject to Section 116 rules when selling real estate.
2. Withholding Tax: The key feature of Section 116 is the requirement for the buyer or their agent to withhold a portion of the purchase price and remit it to the Canada Revenue Agency (CRA).
3. Clearance Certificate: To recover any excess withholding tax or prove that no tax is owed, the non-resident seller must apply for a Section 116 Clearance Certificate from the CRA. This certificate confirms the seller’s tax obligations have been met or that they are eligible for a reduced withholding tax rate.
Impact on Real Estate Transactions
1. Seller’s Responsibility: It is essential for non-resident sellers to understand and comply with Section 116. Failure to do so can result in significant withholding tax, which can be costly and time-consuming to recover.
2. Buyer’s Due Diligence: Buyers are responsible for withholding and remitting the appropriate amount of tax to the CRA. Failing to do this can make the buyer liable for the unpaid tax amount. To avoid potential liabilities, buyers must verify the seller’s tax status and, if necessary, withhold the appropriate amount.
3. Timing Considerations: The withholding tax process should be initiated well in advance of the closing date to ensure there are no delays in the transaction. Sellers should apply for a Section 116 Clearance Certificate as early as possible to avoid any last-minute complications.
Therefore, Section 116 of the Income Tax Act is a crucial provision in the Canadian tax code that has a significant impact on real estate transactions involving non-resident sellers. Understanding the requirements and implications of this section is essential for both buyers and sellers to ensure a smooth and compliant transaction. Non-resident sellers should seek professional guidance to navigate the complexities of Section 116 and minimize their tax liabilities, while buyers should exercise due diligence to fulfill their withholding tax obligations correctly. By adhering to these rules, both parties can participate in real estate transactions with confidence and compliance.
It is recommended to speak to a real estate lawyer in Toronto in order to discuss the required steps that needs to be taken regarding section 116 of the income tax act with their real estate transaction.
Please reach out to Eran Gevantschniter a real estate lawyer in Toronto, Ontario to discuss section 116 of the income tax act in more details.