Written on behalf of Feigenbaum Consulting
As a recent Tax Court of Canada decision illustrates that if you are purchasing a condo, home, or cottage from an owner who is a non-resident of Canada, you may be personally liable for their Canadian capital gains tax, unless certain precautions are taken.
Taxable Canadian Property: A Primer
All Canadian residents must pay tax, in Canada, on their worldwide income (i.e. income earned both in Canada and anywhere outside of Canada).
Non-residents of Canada generally do not have to pay tax in Canada unless they earn Canadian-source income. This includes things like business income earned from having a business in Canada, employment income from a Canadian employer, and, importantly for the purposes of this blog: capital gains from selling real estate and other “taxable Canadian property” (this also includes things like shares of some corporations, certain trusts, and certain business assets).
The purchaser of any taxable Canadian property is required to withhold tax from the purchase price, and remit that sum to the CRA, unless the non-resident vendor obtains a “clearance certificate” from the Minister of National Revenue/the CRA which verifies that the non-resident vendor has made appropriate arrangements to pay the tax. To do so, the vendor must file a Form T2062 (Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Property) within ten days of the planned sale, and must remit 25% of the expected capital gain on the transaction.
Where the non-resident vendor does not obtain this certificate, the Canadian resident buyer is then responsible for the 25% remittance unless “after reasonable inquiry the purchaser has no reason to believe that the non-resident person was not resident in Canada”. The onus is on the purchaser to confirm the vendor’s country of residence.
The Recent Tax Court Decision
The buyer in question purchased a condo in Toronto in 2011 from a seller who was living in California. The sale was completed without either party obtaining a s.116(2) or s.116(5.02) clearance certificate, and without the buyer deducting and remitting 25% of the purchase price.
As a result, the buyer’s 2011 assessment found that he was liable for $92,000 (i.e. 25% of the $368,000 purchase price of the condo).
The trial judge noted that the buyer himself had not made any inquiries about the vendor’s residency, but had “entirely reasonably” engaged his lawyer to act in his best interest at all time, which included ensuring that no liability attached to the buyer under s. 116. As such, the question was whether the lawyer had made “reasonable inquiry” on behalf of his client resulting in “no reason to believe that [the vendor] was not resident in Canada.”
The evidence at trial suggested that:
- The buyer knew from a prior visit to the condo that the seller did not live there and that it was an investment property;
- The buyer’s lawyer was aware that the closing documents would be signed in California;
- Prior to closing, the seller provided a signed affidavit which stated “I am not a non-resident of Canada within the meaning of section 116 of the Income Tax Act (Canada) and nor will I be a non-resident of Canada at the time of closing.”
The judge specifically noted that this “supposed affidavit” stated only that the above statement had been “DECLARED” before a notary, rathe than indicating, per the normal course of an affidavit, that it was either a “sworn” declaration or a “solemn” declaration or that the statement had been declared under penalty of perjury.
The judge went on to say that this contrasted with a separate affidavit, made on the same day regarding “certain HST matters” which did include a solemn declaration.
The judge also considered testimony from the buyer’s lawyer stating his understanding that it was standard practice in Ontario to rely on affidavits for determination of residence, and that it was “not uncommon” for Canadian residents to close sale of Canadian real estate while abroad.
The Court’s Findings
The court found that:
As noted the inquiry [the buyer’s lawyer] carried out was the basic inquiry that I expect he would have done in any event, required by clause 20 of the OREA standard form contract. That would have been adequate had there not been red flags signalling a potential that residency was outside Canada, but here there were such red flags. The response he received to his “satisfactory evidence” request was insufficient to resolve those red flags in the absence of follow-up questions. Note as well that what was received – the one sentence “affidavit” – was unsworn, and it was stated as having been “declared” however absent any statement that it was a solemn declaration and any indication that the declared statement was intended to have the same force and effect as if given under oath and or that it had been declared under penalty of perjury.
With respect to what constituted a “reasonable inquiry”, the judge noted:
…It is obvious that “reasonable inquiry” entails consideration of not just what was asked, but also of response(s) received. Here, follow-up questions would have been appropriate. To say a brief and bald unsworn statement was sufficient to quell concerns raised or that should have been raised by the California-related red flags is not sufficient. Such statements as to residency can well be wrong, intentionally or not. In my view it is not reasonable that they should unconditionally be accepted where, as here, the option of further enquiry exists. Speaking completely generally, in terms of trustworthiness it must not be overlooked that what is said in these statements, including those unsworn, can mean an immediate lessening by 25% of a seller’s proceeds of sale.
The judge therefore concluded that the steps taken by the buyer’s lawyer in this case did not constitute “reasonable inquiry”, noting that:
…Simple questions such as what was the Vendor’s permanent address as opposed to “address for service” and provision of a copy of the Vendor’s driver’s license, would have done much to bring clarity to this situation without undue further efforts.
The buyer’s appeal was therefore dismissed.
If you have questions about this case or about your tax obligations in Canada, contact Feigenbaum Law. Our goal is to create the best tax strategy possible for our clients. We work with you to create a personalized solution that will streamline your compliance requirements and set you up to take advantage of all possible current and future opportunities to reduce your tax burden. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.