As discussed in an earlier blog post, Dealing with Canadian real estate owned by a non-resident? Know the process to ensure you avoid costly errors, when one purchases a real estate property from a non-resident of Canada, they are required by law to withhold 25% of the purchase price and remit it to the Canada Revenue Agency (“CRA”). Failure to do so can result in the CRA requesting from the purchaser these funds, which can often be hundreds of thousands of dollars. When this happens, the purchaser is often the one responsible for paying these funds. Therefore, it is critical to ensure that the purchaser determines if the vendor is a Canadian resident or not.
How does one find this information out? The Income Tax Act of Canada only states that the vendor must make a reasonable inquiry to determine if the vendor is a resident of Canada. Typically, a reasonable inquiry consists of asking the vendor’s lawyer and real estate agent if they are a Canadian resident or not. Normally, the vendor’s representation never has the ability to meet the actual vendor to find this information out. Therefore, the Ontario Real Estate Association (“OREA”) standard agreement of purchase and sale requires the vendor to disclose this information. Often, this is as far as the inquiry goes.
In the case Anibal Kau vs The Queen 2018TCC156, the vendor indicated they were residents of Canada but in reality were not. In the end, the purchaser suffered serious consequences.
In June 2011, Anibal Kau (“the appellant”) purchased a condominium from a resident of the United States. The appellant knew that the vendor treated the condominium as an investment property and was a California native. In addition, the vendor indicated they would be signing the agreement in California.
The vendor declared in an unsworn statement before a California notary public in what was titled an affidavit that they are not a non-resident of Canada nor will they be at the time of closing. This statement was declared but not sworn.
The purchaser’s lawyer also indicated that she did some due diligence work that indicated the vendor was in fact a Canadian. However, due to solicitor client privilege, no details were released on what the lawyer actually did.
Later it was determined that the vendor was in fact not a resident of Canada and that the appellant was required to remit 25% of the purchase price to CRA. As the purchase price was $368,000, the appellant was required to remit $92,000 to CRA. The appellant did not agree with this and felt she did all she could to do to be certain the purchaser was a Canadian. The vendor testified via an affidavit that she was a Canadian resident. What else could be done?
She brought the case before the Tax Court of Canada.
The purchaser trusted their lawyer to ensure everything was done correctly. All the paperwork indicated that the vendor was a Canadian. However, even with the affidavit, she did notice that the vendor’s address was American and did know she was purchasing an investment property where the vendor never lived. She also knew that the signing of the agreement was in California. Lastly, the affidavit was unsworn. The judge expected the purchaser to show some doubt where necessary and not just blind acceptance of the vendor’s statements.
Thus, as part of reasonable inquiry mentioned above, the judge felt that some of these red flags deemed some follow up questions necessary about the vendor’s residency. If the unsworn affidavit had at all responded to the specific red flags as to potential non-residency and assuming those responses made sense, the duty of reasonable inquiry would have been satisfied. However, responses to questions should not be unconditionally accepted if circumstantial evidence proves otherwise.
What does this mean for you?
If you are in the market for a home, an investment or business property, ensure you do your due diligence as to the residence of the vendor. Failure to do so could be very punitive if a mistake is made.