A practical guide

Obtaining a Certificate of Compliance for a Non-resident

If you have a non-resident client selling "Taxable Canadian Property," you must apply for a "Certificate of Compliance" (clearance certificate) under Section 116 of the Income Tax Act to pay tax at 25% of your net gain before selling costs. ("Taxable Canadian property" includes: real estate, land and buildings, bare land, former principal residence, personal use property, shares, and partnership property.)

The waiting period to obtain a certificate of compliance varies from several weeks to several months, depending on the workload in the non-resident section, so you should apply for it as soon as possible. You can apply as soon as your client has completed the "Interim Agreement for Sale & Purchase," which can be used for either a proposed or completed sale. If for a completed sale, the forms must be filed by registered mail within ten days of the sale.

Under Section 116(5) of the Act, if a clearance certificate is not obtained, the purchaser is required to withhold 25% (50% for a depreciable property) of the gross selling price of the property and remit to the Receiver General on behalf of the vendor within 30 days after the end of the month in which the property was sold. The vendor must then file a Section 115 T-1 Personal Tax Return for the year of the disposition showing the capital gain on disposition (proceeds less adjusted cost base, less selling costs). If the property is sold early in the year, the vendor could wait up to 24 months after the sale to get his/her refund, assuming you file the return as soon as possible (in January of the following year).

There are two separate applications required for a depreciable property where capital cost allowance (CCA) has been claimed: Form T-2062 for the gain on the property and T-2062A for recapture. Where a T-2062A form is required, it must be filed with a T-2062. Where no CCA has been claimed on a non-rental property, only Form T-2062 is required. A rental property requires a T-2062A form in all cases, even if no CCA has been claimed.

There must be a separate application for each individual vendor, even if the property is in joint names (spouses, family members, partners, etc). If the property sold is jointly owned, you must supply a list of the other joint owners, names, addresses, SIN's or Taxpayer ID numbers, and the percentage of each persons ownership.

In addition, there must also be a separate application for each property being sold, unless all are being sold to the same purchaser. Each application must include the purchaser's name and address; if more than one T-2062 is filed in a year for a particular vendor, you must also attach a list of all property addresses sold during the year with the purchasers for all applications filed prior to the current application in that year.

Under Section 216, if this is the client's only Canadian rental property, all taxes on the rental income must be assessed and paid prior to the issuance of the certificate of compliance. If the client has other rental properties with an agent and an up-to-date NR-6 form, the tax on the rental income for the property sold can be filed in the normal manner before June 30 of the following year. Where this is the case, you are required to provide the name and address of the dispersing agent, and the related non-resident account number on the documentation that accompanies Form T-2062.

Forms T-2062 and T-2062A have an attached "Supporting Document List" that sets out the required documents for each type of sale. If you review the list carefully and include all the required information, your request will be processed more quickly.

Basically what's required, along with copies of the supporting documents, is a summary of the sale of the property; documents supporting the sale, such as the interim agreement; and a calculation of the adjusted cost base, which includes the original cost, capital additions to property, and adjustments to cost base (interest and propert taxes for bare land). In addition, you are required to provide an allocation of both the gross selling price and th( adjusted cost base between land and buildings, and a description of the allocation method between land and buildings.

You cannot deduct the normal selling costs (commission on sale, legal costs, etc) in the calculation of the selling price for purposes of the T-2062 and T-2062A. These amounts are deductible when you file the tax return to report the gain for the year of sale. Further, all amounts must be converted to Canadian dollars at the relevant transaction dates. (I once had a Swiss client who lost money on his Canadian property investmen when calculated in Swiss Francs, but who had to pay tax on a gain in Canada because of the different foreign exchange rates between the time of purchase and the time of sale.)

If a T-2062A is required, you are required to attach the schedule of undepreciated capital cost of the property at the date of sale and a continuity of the capital cost allowance claimed. For practical purposes, the CCRA will usually accept the capital cost schedule for the subject property for the latest Section 216 Personal Tax Return filed. The relevant tax rate applied to the recapture on the T-2062A form will be the marginal rate that will be applicable when the Section 216 Personal Tax Return is filed for that year.

When the T-2062 form has been approved and the rental income has been assessed, the CCRA will mail or fax a "Request for Payment" of all outstanding taxes under part XIII (rental income, which includes any part I tax on recaptured CCA) and Section 116 of the Income Tax Act (capital gain). Once the payment has been received, the certificate of compliance under Section 116 will be issued.

In Vancouver, the payment (lawyers' trust cheque, certified cheque, bank draft, or money order) can be exchanged for a certificate between the hours of 9 a.m. and 1 p.m. at:

CCRA

Sinclair Centre-Which Building Room #307-757 West Hastings Street Vancouver, BC

For further information on certificates of compliance, refer to Information Circular 72-1784, or call 604-691-4160 and leave a message; they will call you back.

John P. McMilan, CA, is Managing Partner of McMillan & Company. He specializes in the area of high-income individuals and professionals-their corporations, trusts, partnerships, and joint-offices.

Copyright Institute of Chartered Accountants of British Columbia Nov 2002
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