How to Avoid Non-Resident Tax when Buying Canadian Real Estate

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Am I Liable for Canadian Taxes When Buying Property from a Non-Resident of Canada?

I’ve written before on the extremely dangerous issue of non-resident taxes on Canadian real estate. Real estate agents and real estate lawyers in Canada know about non-resident tax. To give buyers comfort that the seller is a legal resident, the classic way to get some protection is to get sellers to sign statutory declarations that say, “I am not a non-resident…” Buyers then rely on the statutory declarations to make a decision that they do not have to collect withholding tax and that there are no CRA non-resident tax issues. But what if that isn’t enough to protect yourself?

To recap, non-residents of Canada are required to pay Canadian tax both yearly on their rental income and, at sale, on their profit. When a non-resident sells a piece of property, the Canada Revenue Agency (CRA) says that unless the seller provides the buyer with a Certificate of Compliance from the CRA stating that the seller has paid his tax, the buyer is responsible for what could be a giant tax bill! Buyers are allowed to protect themselves by withholding 25% of the sale price until the seller provides them with a Certificate of Compliance. Those are the basics of non-resident tax. Of course, it’s a bit more complicated than that.

If the buyer gets a statutory declaration saying the seller is a non-resident, does that always protect the buyer from being responsible for the seller’s tax responsibilities?

In the Financial Post, Jamie Golombeck recently wrote a handy update piece on non-resident tax called “Buyer Beware: How Purchasing a Property from a Non-Resident Could Leave You with a Hefty Tax Bill.” Why should we listen to Jamie? He’s Managing Director, Tax & Estate Planning with CIBC in Toronto. Golombeck is a tax expert; buyers ignore his warning at your own peril!

If the non-resident doesn’t get a certificate, the Canadian resident purchaser is responsible for the 25 per cent tax owing on behalf of the non-resident unless, “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada.” 

In 2017, the CRA was asked whether this “reasonable inquiry standard” can be satisfied if the purchaser obtains a statutory declaration from the vendor that the vendor is not and will not, at the time of closing, be a non-resident of Canada

The CRA’s response was that “the purchaser must take prudent measures to confirm the vendor’s residence status. Each case will be reviewed on an individual basis…. Obtaining such declaration would not, however, provide a due diligence defence if there are facts and circumstances present suggesting that the purchaser should have made further inquiries. Such facts could include, for example, a known mailing address outside of Canada or any other indication of the vendor’s residence being outside Canada in the transaction documentation.”

Golombeck gives the example of a recent Ontario case where the buyer had a declaration from the seller but it wasn’t enough. The buyer got stuck with a huge tax bill because of a lack of due diligence.

The facts were:

  • The seller declared not being a non-resident before a notary in California, but it was not a sworn oath or solemn declaration.
  • The buyer knew at the time of purchase that the seller did not reside in the property, his mailing address was in California, and he would be signing his sale documents in California.

There were other non-resident indicators. The court said all these factors should have alerted the buyer that something might be amiss and the buyer should have done more diligence. For starters, the buyer should have asked why the seller had a California address.

Again, from the Financial Post article: 

The judge felt that there were simply too many red flags to accept the unsworn declaration as evidence that the vendor was truly not a non-resident. The taxpayer could have asked “(s)imple questions such as what was the Vendor’s permanent address … (as well asking for) a copy of the Vendor’s driver’s license.”

In finding the taxpayer liable for the tax, the judge concluded: “(The law) calls for and deserves more than a brief, baldly stated affidavit or solemn declaration when there are factual red-flags potentially suggestive of non-residency…

Conclusion? As a buyer you can’t ignore facts that tell a different story. A seller might say he is a non-resident, but if the surrounding facts don’t support that statement or declaration, a buyer is not protected from a big tax bill.

Was I over exaggerating when I said non-resident tax is an extremely dangerous issue? The buyer had to pay the CRA $92,000!

Be very careful about non-resident tax when buying real estate in Canada.

“Tax” image by Phillip Ingham on Flickr. Used under Creative Commons Attribution-NoDerivs 2.0