Beware when you are buying real estate in Canada from a NON-RESIDENT!
S.116 of the Income Tax Act requires a buyer to “make reasonable inquiries” to ascertain the residency status of any seller of real property.
That generally starts with the seller checking the “resident or non-resident” box contained on the first or last page of the standard BC real estate contract (depending on which version you are using).
Realtors for the Seller often overlook this VERY IMPORTANT clause either because they don’t know why it is there or they have not asked the seller that question when the Buyer’s offer is accepted.
The clause serves a first step in alerting the Buyer of the residency status of the Seller. Normally, if the Seller indicates that he is a resident of Canada the Buyer’s lawyer will have this confirmed with a Statutory Declaration ( which is a document akin to an affidavit) to be signed by the Seller at his lawyer’s office before the closing date.
Obtaining a declaration of residency which is in effect, under oath generally constitutes a reasonable inquiry, unless the Buyer ought to have known otherwise.
If the Buyer fails to make reasonable inquiries and the Seller is a non-resident and does not pay the applicable capital gains taxes on the sale, then THE BUYER is assessed the entire tax by Canada Revenue Agency (“CRA”).
For this reason, the Buyer’s lawyer must INSIST on a hold back from the sale proceeds of between 25% and 33% of the gross sale price (depending on the nature of the property) -although in my experience 25% is more than sufficient to meet the Seller’s tax liability.
This holdback remains in trust until the Seller can provide the Buyer with a Certificate of Compliance from CRA confirming that the taxes with respect to the sale have been paid.
This issue however gets much trickier on a FORECLOSURE SALE or a COURT ORDER ENFORCEMENT SALE.
BC case law holds that on in a foreclosure proceeding the foreclosing party (normally the bank) is considered to be the Seller. This makes logical sense as the bank’s representative accepts the Buyer’s offer on the purchase and sale contract -despite the fact that the bank is not on title to the property as an owner.
The registered owner signs NOTHING (not the sale agreement nor any transfer of title).
Hence, as most financial institutions in Canada are resident here, one would think that there is no residency issue to consider.
However CRA takes the opposite position -namely that in a foreclosure or Court Order Enforcement Act sale the registered owner is the Seller and hence if he is a non-resident, the capital gains tax must be paid out of the sale proceeds (fi applicable).
If the required tax is not paid, CRA will assess the Buyer with the unpaid tax!
Foreclosure lawyers will typically include a three page schedule to the purchase agreement (which few realtors or their purchasers read) which states that the property is sold “as is where is” and that the bank (Seller) makes NO REPRESENTATIONS whatsoever about the property (or the registered owner).
Hence, the Buyer’s lawyer’s requested statutory declaration to confirm residency is normally crossed out and the bank claims ignorance regarding the residency status of the registered owner.
This exact scenario happened in the recent BC Supreme Court case of Mao v. Liu (2017 BCSC 226) except that the sale was a COURT ORDER ENFORCEMENT proceeding.
That means that the Plaintiff obtained a judgment against the registered owner, filed it against the property and sold the property under the Court Order Enforcement Act to a third party.
Thee process is similar to a foreclosure in that the registered owner does NOT participate in the sale as the title is transferred by a court order (often over the objections of the registered owner, who may be contesting the sale).
The BC Supreme Court judge held that neither the Buyer nor his notary made reasonable inquiries as to the residency status of the Seller.
The Seller’s counsel refused to provide any information regarding the residency status of the registered owner.
No holdback was made ant the sale closed.
CRA then assessed the Buyer with a $600,000 tax bill and the Buyer promptly sued his notary and obtained a judgment for the entire amount. As of the time of writing, it is not clear whether the notary’s insurers will appeal the decision.
In this case it was unfortunate that the registered owner AND the judgment holder (who caused the sale) were BOTH non-residents, so it would not have mattered which argument was advanced (that the registered owner was the Seller OR that the judgment holder was the Seller). In this case the hold back should have been made.
The morals of the story:
- Do your due diligence regarding the residency status of the Seller BEFORE the completion date;
- Insist that the residency/non-residency box be checked at the time the contract is signed (or if that is not possible to determine at that time, make it a subject condition in favor of the Buyer that the Seller provide evidence of residency prior to completion);
- If buying under a COURT ORDERED SALE (foreclosure or Court Order Enforcement Act) take extra care, as the party causing the sale (be it a bank or judgment holder) will likely balk at making any representations regarding the residency of the registered owner. That can leave you in the same boat as the notary in the case cited above. Always get competent legal advice BEFORE you write up the offer to purchase and read the schedule to the contract which the selling party’s lawyer will invariably attach.
Disclaimer: The foregoing is for information purposes only and not intended as legal advice to the reader. Always consult with an experienced real estate lawyer when modifying the standard real estate contract in use in BC. In addition statutory law as well as case law may change from time to time which could render this analysis inaccurate in the future.
(C) 2017 Pazder Law Corporation