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.
In any transaction, especially where you are making large investments such as real estate, we recommend always working with experts in your field to ensure peace of mind and minimize any potential liability. Trowbridge works closely with clients to help them understand their tax residency status and tax reporting requirements.
Written for Trowbridge Professional Corporation.
Contact Trowbridge Professional Corporation at Info@trowbridge.ca or contact me directly at Ruby.Chouhan@trowbridge.ca
[Disclaimer: Please keep in mind that everyone’s specific situation is unique. Always seek the advice of a qualified tax advisor. Trowbridge has been providing tax expertise for over 15 years, on a global basis, and provides this article as general information, believed to be correct at the time of publishing. This information should not be used without consulting a tax specialist].