Real Estate Owned by Non-Residents: Risk Situations That Notaries and Lawyers Must Detect and Manage
- Feb 24
- 4 min read
Updated: Apr 21
When a non-resident sells real estate in Canada, most professionals immediately think of the T2062 request for obtaining a certificate of compliance. However, many other situations can trigger a tax obligation, withholding, or legal liability, even when there is no apparent sale. These grey areas represent significant risks for notaries and lawyers working with international clients.
This article highlights the main risk situations, often overlooked, and provides practical strategies for managing them.
1. Transfer to a Corporation or Trust
Many non-residents wish to transfer their property to a Canadian corporation, family trust, or management company for tax or estate planning purposes. Even if control remains in the same hands, such a transfer usually constitutes a disposition for tax purposes.
This can trigger a taxable capital gain and the obligation to obtain a certificate of compliance. Note: being the sole shareholder of the corporation does not exempt the client from tax. Only a specific tax election (rollover under Section 85 of the Income Tax Act) allows deferral of taxation, but it requires a complex filing within strict deadlines. Without this election, the transaction is taxable at fair market value.
How to manage this risk:
Always verify whether the transfer is considered a deemed disposition.
Determine whether a Section 85 rollover is required to avoid immediate taxation.
Consult a tax advisor before drafting any legal deed.
Anticipate withholding and security obligations (the acquiring corporation must withhold tax even if owned by the seller).
2. Gift or Transfer to a Relative
A gratuitous transfer of property to a child, spouse, or parent may seem straightforward legally, but it triggers a deemed disposition at fair market value (FMV). The non-resident is taxed as if they sold the property at market price.
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Major trap (“Cash Trap”): Withholding under Section 116 applies to the recipient (donee). The recipient must remit 25% of the FMV to the tax authorities immediately, even if no payment is made to the donor. Failure to do so creates personal liability for the donor’s tax debt.
Additionally, the CRA routinely recharacterizes nominal sales or gifts (e.g., $1) at their true FMV.
How to manage this risk:
Require an independent FMV appraisal.
Advise the recipient that personal funds may be required to pay withholding (25% of FMV).
Document the client’s informed consent regarding personal liability.
3. Change of Use of the Property
Changing a property from rental to personal use (e.g., a child or parent moves in rent-free) triggers a deemed disposition at FMV (Section 45(1) ITA) and potentially significant tax for the owner. There is a tax return to be filed with the tax authorities.
Therefore:
No withholding obligation.
No security required.
But the client still needs to file a tax return to report the change of use and pay taxes.
How to manage this risk:
Always ask: “Since when has the property not been rented? Who currently occupies it?”
If the change is recent, obtain an FMV assessment at the date of change to fix the tax cost.
Advise the client in writing that a significant Canadian tax will be due next year.
Do not withhold funds or request a T2062 (professional error).
4. Estate Involving a Non-Resident
When a non-resident dies owning property in Canada, specific tax rules apply. Law provides for a deemed disposition at FMV at death. If the heirs are also non-residents, any subsequent sale or transfer will also require a certificate of compliance.
How to manage this risk:
Determine the residency status of the deceased and heirs at file opening.
Notice the client that they need to prepare the required final tax filings.
Notice the client that they need to request tax certificates of compliance.
Avoid distributions before the tax situation is fully clarified.
Coordinate the file with an estate tax specialist.
5. Refinancing and Mortgages
Mortgaging a property owned by a non-resident is not a taxable disposition. However, it represents a major liquidity risk for the future.
“Equity Stripping” Risk: If the non-resident extracts equity through refinancing to move funds out of Canada, there may not be enough funds available when the property is eventually sold to pay taxes. Recall that the 25% withholding is calculated on the total sale price, not net profit after the mortgage.
How to manage this risk:
Make the client aware that future taxes will still be payable even if the property is heavily mortgaged.
Avoid advising on interest deductibility (complex in an international context).
Maintain full documentation of the source and destination of funds.
6. Common Mistakes to Avoid
Frequent errors in practice include:
Limiting analysis to sales and ignoring deemed dispositions (gifts, corporate transfers).
Failing to verify the actual residency status of the owner.
Not including adequate withholding clauses in the deed.
Mistakenly assuming that a pure change of use requires a certificate or withholding (costly professional error).
The Professional’s Role as Risk Manager
In these matters, your role goes far beyond drafting deeds. You are a risk manager and strategic advisor. By asking the right questions, documenting each step, and involving the right experts, you protect both your client and your own professional liability.
Conclusion
Risk situations involving non-resident owners of Canadian real estate are numerous and evolving. They require particular attention, enhanced expertise, and a multidisciplinary approach. Implementing internal, standardized processes for these files is now essential for any modern legal practice.
