According to Canadian income tax laws, non-resident sellers of Canadian real property are required to pay income tax on any financial gain on the sale of their home. If the vendor is a non-resident of Canada, for income tax purposes, a sufficient amount of the gross sale proceeds (anywhere from 25%-50%) should be withheld by the buyer or their counsel and the seller should be required to make an application to Canada Revenue Agency (“CRA”) to obtain a tax clearance certificate. The certificate certifies that a sufficient amount of taxes has been remitted to CRA, in relation to the sale of the home, and that the remaining profits can be disbursed. Obviously, if the seller is a resident of Canada, for income tax purposes, then there is no requirement to withhold funds. To facilitate compliance with these laws, section 116(5) of the Income Tax Act (Canada) imposes an obligation on a purchaser to make a reasonable inquiry to ascertain the residency status of the vendor. If a purchaser fails to make a reasonable inquiry, fails to require the holdback and the vendor turns out to be a non-resident of Canada then the purchaser can see themselves personally liable for all the taxes owed to CRA on the sale of the home.In the absence of any “red flags” in a real estate transaction, the warranties and representations made by the seller in the standard Alberta Residential Purchase Contract and the Transfer of Land regarding their residency status, for income tax purposes, should be sufficient and offer the buyer sufficient protection. As such, no holdback should be required by the buyer. However, if there is a “red flag” then it is the responsibility of the buyers to go further and ask the appropriate follow-up questions to determine the seller’s residency status and the need for a holdback. Examples for “red flags” can include:
- The Purchase Contract being accepted outside of Canada;
- Transfer documents being executed before a Notary Public outside of Canada;
- The seller’s address for service on Title that is outside of Canada;
- The seller has struck out their warranty regarding their residency status on the Purchase Contract; and
- Knowledge that the seller will be leaving Canada on or before the real estate deal closes.
Unfortunately, there is no standard procedure to making a reasonable inquiry if a “red flag” has been identified. Since most buyers, lawyers, and real estate professionals are not tax experts or experts in determining residency, CRA reviews each case on an individual basis. Depending on the nature and severity of the “red flag”, CRA, essentially, looks to determine whether the buyer, or their representatives, appropriately followed up and obtained the necessary evidence to satisfy themselves that they had no further doubt the seller was a resident of Canada. Depending on the nature and severity of the “red flag”, the purchaser may need to collect a myriad of evidence proving the seller’s Canadian residency status to put an end to their doubts. Evidence includes, but is not limited to, the following:
- An unqualified opinion from the seller’s Chartered Accountant regarding the seller’s residency;
- An unqualified opinion from the seller’s lawyer regarding the seller’s residency;
- CRA’s opinion on the seller’s residency status;
- A statutory declaration with evidence (ex: return airplane tickets, copies of driver’s licenses, copies of title to the seller’s principal residence in Canada, etc.) confirming the seller’s residency.
Given that some of the aforementioned “red flags” can arise early on in a real estate transaction, buyers and their representatives must be diligent and if a “red flag” has been identified then they should contact their legal counsel for advice and proceed with making the appropriate inquiries and collecting their evidence to avoid complications on closing. If after collecting the necessary evidence and/or making the necessary inquiries there is still doubt as to the seller’s residency, a buyer should always demand the delivery of a CRA tax clearance certificate to either them or their lawyer and require the correct amount of the gross sale proceeds be held back in accordance with the Income Tax Act (Canada).
If you have any questions concerning the sale of Canadian real property by a non-resident, please do not hesitate to contact Khemka Law or counsel of your choosing. We are always here to assist you and your clients. Thank you for your time and consideration.
Sincerely,
Pranav Khemka
Pranav Khemka, Barrister & Solicitor
T: (403) 457-9577 | F: (403) 457-9578
E: pkhemka@khemkalaw.com
LEGAL: This Thursday Tidbit provides general information only and does not constitute legal advice. Circumstances may vary and no lawyer-client relationship is established from the use or reliance of this information. You are strongly advised to seek any legal advice by directly contacting Khemka Law or counsel of your choosing. Khemka Law does not warrant or guarantee the quality, accuracy or completeness of any information found within this Thursday Tidbit.