For property sellers who are currently living abroad and considered “non-residents of Canada”, the words the "sale is firm" is immediately followed by relief and then excitement for all other parties involved including the buyers, realtors and the legal representatives. Closing day arrives, the paperwork is signed and processed, the names on the registered deed are transferred to the new buyers without concern, and finally the transaction is complete. Years pass until one day a Notice of Assessment arrives in the mail from the Canada Revenue Agency (CRA) requiring the buyers of the home to pay tens of thousands of dollars in unpaid tax on capital gains! Shockingly, the Notice for tax owing is actually the previous sellers’ tax liability and it has been transferred to the buyer who is now personally liable for the amount owing. How could this happen when the deal closed years ago without a hiccup? How can this be prevented from happening in the future? 

In the above scenario, the CRA imposed a tax liability on the buyer of the home as the seller was considered a non-resident of Canada for tax purposes and they failed to comply with the tax requirements related to the disposition of property. The CRA mandates that within 10 days of final closing, any individuals who are considered "non-residents" of Canada must submit a Certificate of Compliance application (Form T2062, “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property”). This Certificate of Compliance application requirement also applies to any individual transferring property, even if the consideration is $0, for example to a relative or family. Failing to submit this application results in a penalty of a maximum $2,500 to each non-resident seller. Failing to submit the Certificate of Compliance application and payment of any tax owing on capital gains will also result in the buyer of the property inheriting the seller’s often large tax burden.

We don’t want to automatically shift the blame to the seller for failing to comply as there could have been a number of reasons behind this. In today’s modern world of frequent travel, working abroad or living in various countries for parts of the year, it can actually be very difficult to assess one’s residency status for tax purposes. An individual’s residency status doesn’t solely depend on the number of days spent in Canada as there are several factors involved, such as family ties, employment, etc. As well, there is a chance that the sellers or buyers were not properly counselled by the appropriate parties involved in the transaction resulting in the issue of potential tax liability not being addressed.

Along with the buyer now inheriting a hefty tax liability, issues like these often result in disputes with not only the seller but other parties involved such as the legal and real estate team, resulting in lawsuits and court proceedings. In real estate transactions, we recommend that all parties (realtor, client, legal representative) enquire about the residency of the seller in early conversations. In addition to a declaration by the seller indicating they are in fact a resident of Canada, parties involved should enquire about where the seller normally resides. Ask questions such as, how much time do they spend outside of Canada? What part of the world do they work in? It’s always better to ask additional questions for your peace of mind. If there is any notion the seller might live abroad or is a non-resident of Canada, inform the legal representatives so they can hold in trust 25% of the gross proceeds of sale until such time that a Certificate of Compliance is issued by the CRA. During this time, if it’s discovered that the sellers are in fact considered residents for tax purposes, then the lawyer can easily release the funds being held in trust as the "Certificate of Compliance" requirement is then void.

Written for Trowbridge Professional Corporation. 

Moving or working abroad does not necessarily mean you are considered a non-resident for tax purposes. Depending on your ties to Canada, number of days in Canada, and other factors, the Canada Revenue Agency (CRA) may consider you a factual resident, deemed resident, non-resident, or deemed non-resident.

If you are a non-resident, properly exiting the Canadian tax system is crucial; otherwise, there is potential for double taxation on your worldwide income, application of incorrect tax rates, and penalties and/or interest accruing. In order to terminate your Canadian residence status in the tax system, you will need to file a “departure tax return” indicating your date of departure. This date of departure varies if you have a spouse or dependents or if you are becoming a deemed resident of a new country. Furthermore, on your final departure tax return, you may need to include a “deemed disposition.”

?If leaving the country, the CRA treats any property you own as if it was sold at the current fair market value when you become a non-resident. Depending on whether there is a capital gain or capital loss, tax may be applicable or a loss could be claimed on your return.

Leaving Canada behind can be a daunting process, so be sure to surround yourself with experts who can provide you with helpful advice for a worry-free transition.

Written for Trowbridge Professional Corporation. 

As the Canadian real estate industry from province to province continues to thrive, there has been vast growth of pre-construction condo buildings in large cities such as Toronto and Vancouver. In Toronto alone, there are over 80 approved new condo towers that will be built over the next 5 years. Many of these units will be purchased and the rights to the Purchase Agreement will be assigned to new buyers, before the building has completed construction, for a profit.

Typically, the Assignor of the contract will earn a profit and this profit (or loss) must be reported to the Canada Revenue Agency (CRA) and then tax must be paid on income. The assignment, in the eyes of the CRA, is considered a disposition of property. A major concern when reporting income from an assignment is whether the profit is considered a capital gain or business income. If income is considered a ‘capital gain’ or ‘capital loss’, it is subject to special treatment under the Income Tax Act, allowing only 50% of the capital gain as taxable. Should this income be considered business income such that the full income is taxable?  

Generally, capital gains treatment occurs with the disposition of an asset that was acquired to be held for a long term, to either produce income or be used personally, whereas business income treatment occurs where the asset was acquired with the sole purpose to be sold at a profit. To determine whether the income from assignment is considered a capital gain or business income, intent and a number of factors will be reviewed by the CRA to determine the nature of income:

• The taxpayer’s intention related to the property at the time of purchase and the manner in which it was carried out.

• The nature of the taxpayer’s profession, business and history in dealing with real estate transactions. Often those in the real estate industry are deemed to earn business income as they are involved in the industry.

• Property flipping - those who buy and resell homes in a short period of time for a profit tend to be treated as earning business income.

• The period of ownership.

• Reasons for, and the nature of, the sale, etc.

In the past, many assignment transactions were not disclosed to the CRA however, in recent years with the booming real estate industry, the CRA has started to investigate assignment transactions. It has also begun demanding that building developers release the list of individuals on Registered Deeds in order to discover assignors who have not reported profit. We recommend that any income from the sale of Canadian real estate be reported to the CRA, the failure of which may result in penalties, assessed arrears interest and increased scrutiny. 

Additional Considerations for Non-Residents of Canada that Assign their Rights to a Unit

?Since Canadian real estate, or an option to acquire an interest in Canadian real estate is considered taxable Canadian property, the sale of either by a non-resident of Canada is reportable in Canada. As the non-resident of Canada is disposing (i.e., assigning) their interest in taxable Canadian property, there is a requirement to submit a Certificate of Compliance application within 10 days of the assignment transaction. Failing to submit the application in a timely fashion will result in a maximum penalty of $2,500 per taxpayer. Further, the purchaser may be liable to withhold and remit 25% of the gross proceeds as a federal tax withholding (plus an additional 12.875% of Quebec tax withholding for Quebec real estate), absent a waiver.

Written for Trowbridge Professional Corporation.