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“Not a Non-Resident” … a Pricey Double Negative.

Now, where did I put that 5.6 million dollars...

Imagine you just bought a property worth $5,560,000. (Long pause there. That’s a pretty unlikely thought for a lot of people.)

As you are finally settling in with the millionth empty box, you go to check the mail. You find a bill to the Canada Revenue Agency for $695,000. Once the sheer terror of owing that kind of money sets in, you decide to call your lawyer to understand what happened. He confirms that you are on the hook for it.

A large number of expletives rain down on the phone.

….

Some variation of that occurred in the recent British Columbia Supreme Court case of Mao v. Liu, 2017 BCSC 226. In BC, it is a common practice to use Notaries to assist in basic land transactions. The purchaser in this case approached a Notary to assist in buying the home at issue. Following the end of the transaction, it was identified that one of the owners was a non-resident, and the CRA was seeking tax from the purchaser in the amount of $695,000.

Non-residents have an obligation to remit tax on the capital gain of their taxable property. This is done through an obligation to holdback 25% until you obtain a clearance certificate. Often upon the delivery of the relevant forms to the CRA, they will calculate the amount that is to be remitted on the gain, and then issue the clearance certificate upon payment. That amount can be considerably less than the 25% heldback. However, if not completed, there can be an obligation on the purchaser to pay a penalty to the CRA in certain situations, especially if reasonable diligence was not performed to ascertain residency.

Some of the key facts of the case:

• The property was being sold by court order. A creditor was in charge of selling the land on behalf of the owner.

• The lawyer for the vendor creditor specified that they would not be providing a statutory declaration confirming residency because they were not the owner, and had no idea as to the residency status.

• The Notary’s engagement letter specified that he would “negotiate appropriate closing undertakings with solicitor/notary for the Seller” and would “make inquiries as to the residency status of the Seller pursuant to the Income Tax Acts [sic] as required”;

• The court determined that when it became clear that the Notary would not receive the necessary statutory declaration from the vendor, he did not advise the client as to risks or discuss options.

• As part of the closing, he did not request a clearance certificate.

Some facts that speak to the appropriate level of due diligence includes:

• The vendors’ statement of adjustments indicated that they were not non-residents. (However, this was likely a precedent document that was not edited appropriately)

• The sale was approved with a requirement that the vendors deal with “taxes, arrears of taxes, interest and penalties on arrears of taxes in respect of the [property]”, but the court deemed that this did not include the withholding amount.

• There is a comment that the judge that “I do not accept the language of the contract of purchase and sale imposed a burden on BLG to withhold the non-resident portion of the purchase price.” It’s not clear what contract language was inferred to have provided this obligation.

For sellers and buyers, I encourage you to understand your obligations under the Income Tax Act, and to discuss them with the relevant professionals that are assisting you.

For real estate professionals, this decision provides a basis for some re-evaluation of current practices. While a real estate agent was not included in this decision, it is not clear if BC has the same standard contract language as Saskatchewan. In the current Saskatchewan Real Estate Commission Residential Contract of Purchase and Sale, section 6.2(b) indicates the following:

“6.2 Unless otherwise stated herein, the Seller represents and warrants to the Buyer that:
(b)the Seller is not a non-resident of Canada for the purposes of the Income Tax Act (Canada);”

There could be some liability on the vendor’s real estate agent if they failed to make adequate inquiries as to the residency status of their client and provided that warranty.

For lawyers, the practice of obtaining a statutory declaration to confirm residency is not a common one in Saskatchewan. As a group of lawyers practicing in this field, we will need to review the decision and to determine if our practices need some revision to react to this decision, or if it is sufficiently distinguishable that we are fine with current practices.

2 replies
  1. Pauline relkey
    Pauline relkey says:

    What do we use that crazy wording “seller is not a non-resident”. Isn’t it clearer to say “seller is a resident?”

    Reply
    • Marc Kelly
      Marc Kelly says:

      Its likely because the term “non-resident” is defined in the Income Tax Act, and for clarity’s sake, we are saying that the sections related to the non resident do not apply.

      Reply

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