International Tax Treaties and the Disposition of Real Estate in Canada by a Non-Resident: What Notaries and Lawyers Must Know

When a non-resident client disposes of real estate located in Canada, the analysis does not stop at the domestic rules set out in the Income Tax Act. It must also take into account, in many cases, the existence of a tax treaty between Canada and the seller’s country of residence. This international dimension can influence planning, the client’s perception of withholding, and the final reporting of gains in their home country, although it generally does not eliminate Canada’s tax jurisdiction over the real estate gain.

For notaries and lawyers involved in the transaction, a general understanding of the role of tax treaties helps anticipate certain questions, better guide the client, and avoid misunderstandings.

1. Fundamental Principle: Primary Taxation by the State Where the Property Is Located

In nearly all tax treaties signed by Canada, one principle remains constant: gains arising from the disposition of real estate are taxable in the state where the property is situated.

Thus, when a non-resident sells real estate located in Canada, Canada retains the primary right to tax the capital gain, regardless of the country in which the seller resides.

Concretely, this principle means:

• The tax treaty does not exempt the seller from Canadian tax obligations

• The certificate of compliance (requested with T2062 and, in Quebec, TP-1097) remains mandatory

• Withholding under Section 116 of the Income Tax Act applies, with or without a treaty

This is an essential point to explain to a non-resident client who may mistakenly believe that the treaty automatically exempts them from Canadian tax.

2. Actual Role of the Tax Treaty: Avoiding Double Taxation

If the treaty does not eliminate Canadian tax, its main purpose is to prevent full double taxation of the same gain.

Generally, the following mechanism applies:

• Canada taxes the capital gain arising from the sale of the property.

• The seller’s country of residence also includes this gain in the local tax return.

• However, a foreign tax credit is granted to the resident for tax already paid in Canada.

In principle, this prevents the gain from being taxed twice at the full rate.

The treaty is therefore most relevant at the stage of the tax return in the seller’s country of residence, rather than at the time of the notarized transaction itself.

3. Special Case: Planning Based on Tax Residency

The seller’s tax residency is a determining factor that must be precisely established. This is not simply a matter of citizenship or place of residence, but a fiscal concept based on specific criteria.

The same client could be:

• A tax resident of a country with a treaty with Canada

• A resident of a country without a treaty

• A dual resident under domestic laws, requiring application of the treaty’s “tie-breaker” rules

For the notary or lawyer, it is prudent to obtain a written declaration of the seller’s tax residency status and, where relevant, verification by a tax advisor.

An incorrect qualification can lead to improper application of withholding and reporting obligations.

4. Tax Treaties and Effective Tax Rates

Tax treaties do not directly modify Canada’s tax rate on real estate gains. It remains determined according to Canadian rules applicable to non-residents, including:

• Inclusion of 50% of the capital gain in taxable income

• Effective tax rate depending on the province where the property is located

• Separate treatment of depreciation recapture as ordinary income

However, the treaty can influence:

• The overall final rate once Canadian and foreign taxes are combined

• The strategy for the sale (timing, structure, use of losses, etc.)

• The choice to hold certain assets through intermediate entities

This usually goes beyond the strict scope of the real estate transaction but is part of the client’s long-term strategic considerations.

5. Sales Through a Foreign Corporation

A frequent scenario involves holding the property through a foreign corporation rather than an individual.

Even in this case, most tax treaties confirm Canada’s right to tax the gain if the value of the corporation’s shares is primarily based on real estate located in Canada.

In other words, transferring a property into a foreign corporation or selling its shares generally does not avoid Canadian tax if the principal asset remains Canadian real estate.

This anti-avoidance rule is often underestimated by clients and must be kept in mind by the professional analyzing the legal ownership structure.

6. Practical Implications for Notaries and Lawyers

Even if tax treaties do not directly affect the execution of the sale, they have a concrete impact on client relations and file management:

• The client may refuse or contest the withholding, believing they are protected by a treaty

• Some foreign advisors may provide guidance inconsistent with Canadian rules

• Delays may occur if the client waits for confirmation of residency status from their foreign tax advisor before acting

The notary or lawyer’s role is to clearly remind the client that:

• Canadian tax laws apply primarily to the transaction

• Withholding is non-negotiable without a certificate of compliance

• The treaty will be taken into account later, as part of the seller’s foreign tax filing

7. Recommended Approach with Non-Resident Clients

To avoid conflicts or misunderstandings, it is recommended to adopt an educational and documented approach with the client:

• Explain that the treaty does not exempt them from withholding

• Illustrate the foreign tax credit mechanism

• Encourage coordination between the Canadian and foreign tax advisors

• Document in writing the information provided to the seller

This transparency protects both the client and the professional in the event of future disputes.

Conclusion

Tax treaties play a key role in eliminating double taxation but do not provide an escape from Canadian taxation on real estate gains. In notarial and legal practice, they primarily operate in the background, during the client’s overall tax planning.

For notaries and lawyers, mastery of this principle allows them to better manage expectations, avoid misinterpretation, and ensure smooth handling of increasingly internationalized transactions.