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What Realtors Need to Know About Residency Status

 

Realtors are asked to get both the buyers and sellers to initial off on their residency status as part of every purchase and sale transaction. Careful attention should be paid to this detail as there are potentially damaging results to the purchaser when this is overlooked.

 

Non-residents of Canada are subject to Canadian income tax on the disposition of Taxable Canadian Property (TCP). TCP includes, amongst certain other things, real estate located in Canada. The Canada Revenue Agency (CRA) has no direct authority to collect taxes from non-residents of Canada. Therefore, specific rules in section 116 of the Income Tax Act (Canada) (the “Act”) require that the purchaser of TCP must withhold the lesser of 25% of the purchase price or the amount provided in a clearance certificate issued by the CRA.

 

The responsibility to withhold the 25% of the purchase price is placed on the purchaser, unless:

  1. The purchaser has made reasonable inquiry that the vendor is not a non-resident of Canada and has no reason to believe that the non-resident person was not resident in Canada;
  2. The property is treaty-protected property pursuant to subsection 116(5.01) of the Act; or
  3. A clearance certificate is obtained from CRA.

 

 

What is Reasonable Inquiry?

 

There is no definition in the Act of what “reasonable inquiry” means. The CRA has provided some guidance in IC72-17R6 Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada – Section 116:

 

The purchaser must take prudent measures to confirm the vendor’s residence status. The CRA will review each case on an individual basis whenever a purchaser assessment is being considered. The purchaser may become liable if, for any reason, the CRA believes that the purchaser could have or should have known that the vendor was a non‑resident or did not take reasonable steps to find out the vendor’s residence status. The CRA will not make inquiries on behalf of a purchaser in this regard.

 

It is recommended that realtors comply with the client identification and verification procedures set out by their professional organization and fill out Section C – Client Risk on the FINTRAC – Individual Identification Information Record.

 

One way to avoid the liability being shifted to the purchaser is to obtain a written declaration from the vendor to confirm that the vendor is not a non-resident of Canada for tax purposes. This is generally standard practice, but can still leave the purchaser with exposure if the purchaser ought to have known otherwise.

 

If a declaration of Canadian residency is not obtained from the vendor, additional steps should be taken. Requesting copies of the vendor’s Canadian tax returns and notice of assessments may be prudent.

 

Where there are any red flags, it is the purchaser’s responsibility to follow up. Ignoring suspicious or unusual occurrences will not help defend that a reasonable inquiry was made. For example, if the address of the vendor is outside of Canada, follow-up questions should be asked as to why a foreign address is being used, and additional evidence of residency should be obtained.

 

If you are not able to get comfort on the vendor’s residency, the safest way to avoid inheriting an unexpected liability is to include a holdback equal to 25% of the purchase price until the residency of the vendor is confirmed. The purchase and sale agreement should be drafted to allow the purchaser to make this withholding.

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