Buyer Beware – Uncovering the Taxes arising from Non-Residency of the Property Seller
Did you know that the Canadian tax code has a rule in which the property purchaser can be held responsible for paying the capital gains tax on the transaction on behalf of the non-resident seller?
You will need to take precautions if you are dealing with a non-resident seller of a house or condo if you don’t want to be responsible for paying someone else’s capital gains tax. Let’s review the facts of the recent case, in which this matter was highlighted.
All Canadian residents have to pay tax on their worldwide income, while non-residents pay Canadian taxes, only when they earn income from Canadian sources. They may earn incomes from rental, dividends, employment, business and gains from selling Canadian real estate. Non-resident withholding tax is applicable on rental and dividend income.
Canadian Income Tax Act makes the purchaser of the property responsible for withholding 25 per cent of the purchase price from the non-resident seller. This withholding will not be done if the non-resident seller obtains a clearance certificate from the Canada Revenue Agency.
The request for the certificate needs to be made by paying 25% of the expected capital gain on the transaction along with filing the completed Form T2062- “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property” within ten days of the planned sale.
In 2017, the CRA clarified that it is the property purchaser’s responsibility to confirm that legal status of the seller of the property. The purchaser should do proper inquiries and complete due diligence.
In the recent case, the seller’s foreign address and the declaration were indicators which were missed by the buyer of the property.
In June 2011, a Canadian taxpayer brought a condominium in Toronto from a suspected non-resident of Canada. No clearance certificate or purchase price withholding was done in the transaction, and the purchaser was held responsible by the Tax Court, for payment of $92000 of capital gains tax.
The taxpayer was aware that it was an investment property, bought in 2009 by the seller, who did not reside there. The purchaser’s lawyer was informed that the closing documents would be signed by the seller in California. The seller also signed a statement made before a California notary public in Danville, California which stated that the seller is a non-resident of Canada at the time of sale and closing the transaction.
The Judge declared the property purchaser is to be liable for the tax as there were many concerns which reflected the non-residency of the seller. Fiscal concerns necessitate that the purchaser should have done more due diligence to discover the residency of the seller of the property.
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