Mortgage Broker

taxburden 44 | spring 2017 cmba-achc.ca CmB magazine Buyer Pays the Tax As you might expect, a number of non- resident sellers do not follow the advance report procedure and fail to pay the tax. In such cases, ITA, section 116 makes the buyer responsible to pay the tax, unless: n the buyer received a certificate from the Minister; n a tax treaty applies to cover the non-resident; or n aer reasonable inquiry, the buyer had no reason to believe that the non-resident person was not resident in Canada. If the buyer does not satisfy at least one of the above three conditions, the buyer has 30 days (from the end of the month in which the property was purchased) to remit 25 per cent (or sometimes 50 per cent) of the purchase price to CRA. e practice is that, again, the time limit is oen extended. PrudenT STePS Clearance Certificate e cleanest way to address the matter of the tax when the property is being purchased directly from the seller is for the seller to obtain a certificate. at way, CRA is paid the tax, the seller pays his or her own tax, and the buyer is made aware that the seller has made arrangements to pay the tax. It would be prudent to have the purchase agreement state that the seller is required to obtain a comfort letter and certificate from the Minister regarding the transaction. However, obtaining a certificate in an involuntary sale can be a little more challenging. e seller who has court-ordered conduct of sale may not have information as to the registered owner's residency. As well, there is some issue as to whether the seller is in fact the registered owner or the party that has conduct of the sale. ere is some anticipation of this issue going to court in B.C. in the next short; hopefully, some guidance for the industry will result. e party that has conduct of sale is nevertheless required to conduct the sale in accordance with the court order approving the sale. It would be prudent to have the court order specify whether the tax is to be paid from the sales proceeds and whether it is to be paid in priority to one or more other payments. Alternatively, the order could reflect that the buyer has the right to deduct the amount of the tax from the sales proceeds and remit that amount to CRA. Treaty-Protected Property Some countries have tax treaties with Canada. Capital gains earned by a non-resident of Canada on treaty-protected property are excluded from Canadian taxation. is exception is rarely relied upon. It would be asking quite a lot for a buyer to investigate the residency of a seller and to have the knowledge to conclude that the other country has a treaty with Canada that would treat the property as treaty-protected. Even if the buyer comes to the conclusion that the treaty exception applies, it applies only if the buyer gives notice to the Minister of that conclusion within 30 days aer the transaction closes. While it would be prudent to gather the information to assess if the treaty exception applied, in almost all cases doing so would be unrealistic. reasonable Inquiry Unfortunately, there is no case law that can definitively tell us what amounts to a reasonable inquiry; Mao v. Liu, 2017 BCSC 226 (a recent case of the Supreme Court of BC) does provide some guidance as to what does not (see below). Although in some situations the buyer knows the residency status of the seller (such as a purchase from a relative or acquaintance), most oen the buyer and the seller are, and remain throughout, absolute strangers to one another. It would be prudent for the buyer in every purchase to make and document a reasonable inquiry as to whether the seller is a non-resident of Canada. e inquiry is commonly made by the conveyancing practice of having the seller swear a statutory declaration that the seller is not and will at the time of closing not be a non-resident of Canada with the meaning of the ITA. In B.C., the Real Estate Association is considering a change to the standard form Contract of Purchase and Sale to contractually obligate the seller to declare residency status for purposes of the ITA. e change might be passed in the next few months. is amendment could however be of limited effectiveness given that: Mao v. Liu, 2017 BCSC 226 is a recent case of the Supreme Court of British Columbia in which the buyer agreed to purchase real estate in a forced sale proceeding. The sale was, pursuant to a court order, being conducted by a judgment creditor registered against title. The buyer's notary asked the lawyer acting for the lender to provide either a statutory declaration regarding the residency of the seller or an ITA clearance certificate. The lawyer declined to provide either, stating that the client was a creditor of the owner and not the owner of the real estate. The notary nevertheless closed the transaction. Sometime after the closing, the CRA demanded $695,000 in capital gains tax from the buyer. The buyer sued the notary. In the absence of a clearance certificate, the ITA allowed the buyer to escape paying the tax if the buyer had made reasonable inquiry and had no reason to believe that the seller was not resident in Canada. The notary had made no inquiries as to the residency of the seller, other than having made the request that was declined by the lawyer. The Court said that the request did not alone amount to a reasonable inquiry. The additional facts that the seller had owned the property for 12 years, the Land Title Office registration indicated the address of the property as the address of the owner, and there was a history of mortgages registered against the property in favour of Canadian financial institutions did not raise the inquiry to being reasonable. The Court said that as the notary had not conducted a reasonable inquiry as to the seller residency, tax was payable by the buyer. The Court went on to say that the notary had contracted with the buyer to make the reasonable inquiry required by the ITA, failed to make the reasonable inquiry and failed to advise the buyer of the potential tax liability. As the notary had not performed its duties to the standard of a reasonably competent notary, the notary was responsible to the buyer for damages. The amount of the damages has yet to be decided but the Court noted that CRA had assessed capital gains tax of $695,000. The decision has been appealed by the notary. InSuffICIenT InquIry – The Mao deCISIon

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