“Nothing in fine print is ever good news” – Andy Rooney

Weekly Update – A Warning To Home Buyers

You may have read about a July 31st ruling upheld by the Tax Court of Canada regarding Section 116 of our tax law. This specific section requires the purchaser of real estate to withhold 25 per cent of the purchase price and send it to the CRA if the seller is a non-resident. Section 116 requires the purchaser to make “a reasonable inquiry” and to “have no reason to believe the seller is a non-resident of Canada”. If, based on reasonable inquiry, the purchaser does not have the belief the seller is a resident of Canada, (s)he is required to withhold the 25 per cent tax and forward it to the CRA.

Section 116 came into full view in the case of Kau v. the Queen (2018 TCC156). Mr. Kau purchased a condo suite in June 2011 from “Mr. Y” for $368,000. Mr. Kau, through his lawyer, inquired as to the residency status of Mr. Y, and received a signed affidavit from Mr. Y that “I am not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada) and nor will I be a non-resident of Canada at the time of closing”; however, he had a California address.

Here’s the catch: the CRA rejected the signed affidavit by Mr. Y, and therefore ruled that Mr. Kau was responsible for the 25 per cent withholding tax on the sale, concluding he had failed to make the reasonable inquiry.

Naturally, Mr. Kau took the case to court, where the Tax Court of Canada upheld the CRA’s decision. Mr. Kau was assessed a $92,000 tax bill by the CRA on the purchase.

The Tax Court judge on the case said the affidavit wasn’t good enough because it wasn’t a “Solemn Declaration”. A Solemn Declaration carries the weight of an oath and would be considered “good enough” to qualify as reasonable inquiry. A “Sworn Affidavit” (rather than a signed affidavit) would have also sufficed as reasonable inquiry.

The moral of the story is this: if you are thinking of buying a home and suspect the seller is or might be a non-resident, you can obtain a “Clearance Certificate” from the CRA, which confirms that you don’t need to withhold any tax. Or, you can get the above-mentioned “Sworn Affidavit” or “Solemn Declaration”.

Certainly, you should talk about these options with your lawyer as well, as (s)he would be able to offer the best advice on the matter.

Sources: The Globe and Mail

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.