“Not a Non Resident” – And Other Phrases that Can Cost You $92,000

The Tax Court of Canada affirmed a tax assessment this summer of $92,000 on what appears to be an innocent purchaser of residential real estate property. The case of Kau v. The Queen, 2018 TCC 156 demonstrates one of the other tax liability that can affect purchasers when buying a home. Purchasers either need to ensure that taxes are paid or need to use reasonable inquiries to determine that the taxes should not be paid.

This case has been on my radar for a couple months, and has the potential for liability all over it. How it would apply locally is unknown, as there are some material differences between Ontario and Saskatchewan’s standard contract, and some difference in practice between lawyers as well. However, the differences between the language may impose MORE risk on Realtors if they fail to understand all aspects of the document they are signing with their clients. Lawyers locally will need to revisit their practices to determine if existing processes are adequate.

The decision is focused on s. 116(5)(a) of the Income Tax Act, which reads:

(5) Where in a taxation year a purchaser has acquired from a non-resident person any taxable Canadian property (other than depreciable property of excluded property) of the non-resident person, the purchaser, unless
(a) after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada…is liable to pay…as tax…on behalf of the non-resident person…]

This decision is simple enough. The Appellant was appealing a tax decision in which he was assessed $92,000 for the failure to retain 25% of the purchase price of a property that he purchased. He was assessed this amount as the Vendor was a non-resident for the purposes of the Income Tax Act. The court determined that he, through his lawyer, failed to make “reasonable inquiries” into the vendor’s residency status.

Signs or “Red Flags” that the Individual was a Non Resident:
• Address for service for vendor was located in USA both at the time of sale and purchase.
• Documents were signed in USA by Vendor.
• Affidavit referred to below was “declared” not “sworn”

Evidence to the Contrary
• An unsworn written statement declaring that they are not a non resident, delivered to the Purchaser’s lawyer.
• Standard local practice to rely on the document for determining residency.

The standard contract influenced the decision as well. The relevant portion of Ontario’s standard form (Clause 20 of the OREA (Ontario Real Estate Association) Agreement reads:

Buyer shall be credited towards the Purchase Price with the amount, if any, necessary for the Buyer to pay to the Minister of National Revenue to satisfy Buyer’s liability in respect of tax payable by Seller under the non-residency provisions of the Income Tax Act by reason of this sale. Buyer shall not claim such credit if Seller delivers on completion the prescribed certificate or a statutory declaration that Seller is not then a non-resident of Canada.

The relevant portion of Saskatchewan’s form is below:

Section 6.2b of the Offer to Purchase that states “The Seller is not a non-resident of Canada for the purposes of the Income Tax Act (Canada).”

The reason I would say this imposes more liability on the Realtor in Saskatchewan is that this section affirms the non residency status of the Vendor. It is different from the Ontario form as the Ontario form contemplates that the individual may be a non-resident, and places the obligation on the lawyers to determine that issue.

The remedy? It is a tough one. You could await a clearance certificate on every transaction. The problem is that this is a slow process and often there is not enough equity in properties to hold back the 25% to await the results of the clearance certificate. We could get a sworn declaration completed. That is probably not a hard transition to make, as most lawyers already get a declaration completed for the GST aspects of the transaction. However, given the comments in the decision, this may not be sufficient by itself. The answer appears to be in the short term that we just have to pay closer attention to these issues, and ask some questions if our spidey senses go off. Unfortunately, this is a solution that will drive professionals who prefer certainty and clarity crazy.