Real Estate Buyers Beware: Huge Tax Liability Lurks!


Blog by Arnold Shuchat | March 29th, 2017


A recent court case at the Supreme Court of British Columbia Mao v. Liu, 2017 BCSC 226 (CanLII), http://canlii.ca/t/gxgpp together with renewed enthusiasm at the Canada Revenue Agency increases the potential risks of not being properly represented on the purchase of a property in Canada.

A recent study I undertook, only of residential properties in Richmond, indicated that almost 1/3 of properties sold at the time of the study, being at the beginning of 2017 were likely properties bought for investment purposes.  These properties could very well have been owned by foreign interests who were not Canadian resident taxpayers.  Aside from a small "checkmark" on a standard offer to purchase which is supposed to serve as an indicator as to whether a seller is a Canadian resident or not, there is no way of knowing whether same is in fact true. Consequently, as a result of s. 116 of the Income Tax Act, a buyer may be liable for up to 25% of the purchase price if purchased from a non-resident owner and no reasonable effort was taken to determine the residency of the seller.

In the above legal case, the buyer was so assessed and had to pay the exhorbitant amount of some $600,000 in taxes to the CRA within a few months after having purchased the property. She sued her notary who after too long a time, sued the Real Estate Brokerage of Royal Pacific Realty and her Realtor, attempting to bring them into the same action as third parties.

The Court held the buyer's notary was liable to reimburse the buyer for the amount of taxes she had to pay, not accepting that the notary had advised her as to the risks of being assessed for the tax if she would be proceeding with the purchase.

The law states: 

Liability of purchaser

(5) Where in a taxation year a purchaser has acquired from a non-resident person any taxable Canadian property (other than depreciable property or 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,

(a.1) subsection (5.01) applies to the acquisition, or

(b) a certificate under subsection 116(4) has been issued to the purchaser by the Minister in respect of the property,

is liable to pay, and shall remit to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property, as tax under this Part for the year on behalf of the non-resident person, 25% of the amount, if any, by which

(c) the cost to the purchaser of the property so acquired

exceeds

(d) the certificate limit fixed by the certificate, if any, issued under subsection 116(2) in respect of the disposition of the property by the non-resident person to the purchaser,

and is entitled to deduct or withhold from any amount paid or credited by the purchaser to the non-resident person or otherwise recover from the non-resident person any amount paid by the purchaser as such a tax.

As a result of the increased CRA scrutiny of foreign property transactions and the general prevalence of foreign investor money stashed in Candian residential property, the risks are high to a purchaser who goes it alone, or who engages naive or perhaps inexperienced professionals to protect them.  The fact that the plaintiff recovered the amount of the CRA asessment from the defendent did not prevent or insulate her from the extreme heartache and legal bills which ensued.

In summary, offers need to provide the buyer with sufficient assurances of Canadian Residency from the seller to enable the buyer to prove "after a reasonable inquiry that the purchaser had no reason to believe that the non-resident person was not resident in Canada".