Based on a recent action by CRA and a BC Court decision, we need to make you aware of some important steps to take to protect yourself.
“This ruling targets a weakness in Canadian laws that often leads foreign owners of real estate in cities such as Metro Vancouver and Toronto to claim they are “residents of Canada for tax purposes” when they are not.
The landmark B.C. decision requires notary public Tony Liu to pay his client more than $600,000 because Liu failed to adequately determine whether the Vancouver house his client was buying for $5.5 million had been owned by a tax resident of Canada.
As a result, the Canada Revenue Agency did not get paid, at the time of the sale, the 25 per cent capital gains tax it charges non-resident sellers of Canadian property on any profit they make on the sale.
So the CRA later demanded the buyer pay the $600,000 in tax. The buyer, in turn, successfully sued Liu, arguing Liu failed to discover the seller was not a tax resident of Canada.
The CRA considers people who don’t live in the country at least six months a year and don’t pay income taxes here to be foreign property investors and speculators and thus subject to capital gains taxes.
As a result of this case we asked Richard Bell, Bell Alliance to provide his advice to us, as a firm that specializes in real estate conveyance.
“As an absolute minimum make sure that the Residency box is checked off 100% of the time by the seller.
CRA has a mandate to go after these sellers, and if no withholding tax was collected, they have the ability to go after the buyer – which means Realtors will also be on the buyer’s radar for a law suit.
Bell is also seeing cases where the seller incorrectly checks off the Resident box, when they’re not a resident, which again, could come back on thermal estate agent.
He says, if our buyer agent is showing a vacant house, with a clearly non-resident seller, which is a common scenario, and the box is checked off as Resident, he said our agent needs to pass that along to the buyers lawyer or notary, and they will deal with it.
He said the lawyers know less about the seller than we do, but they get the seller to sign a declaration form when they have good cause to do so and it protects them from this situation.
In this case the notary did not get the seller to sign a declaration that they were a Canadian Resident, the tax was not collected, CRA claimed the tax from the buyer and the law suit followed”.
What steps do we take now to protect ourselves:
- Always ensure the box declaring Canadian residency has been completed; as the buyer’s agent you have a duty to protect your client.
As the sellers agent you have a duty to ensure the Residency box is checked off on the contract.
Our conveyance staff will be monitoring the Residency box on all Contracts of Purchase and Sale and if not checked off will report it to the Managing Broker for follow up.
- Always alert the Closing lawyer or notary if the home is unoccupied and the seller has declared themselves as a resident. Save that notice in your file as a reference if needed.