Buyer Beware: Tax Implications of
Buying from a Foreign Owner
Imagine being the lucky winner in a bidding war and finding out you have to pay $625,000 extra on a $2,500,000 house purchase or even $125,000 on a $500,000 condo purchase. If you are buying a house or condo, there is important information you need to know about. If you suspect the seller of the property is not a resident of Canada or won’t be on the completion date, the onus is on you, the purchaser, to perform your due diligence to determine the sellers’ residency status.
Employment income, income from a business operated in Canada, and capital gains earned from selling Canadian real estate are all subject to tax. If a U.S. resident owned a condo in Toronto they used while working here temporarily and sold it, they would likely incur a capital gains tax. Likewise, if an Asian family had purchased a property for their children to attend high school or university and then sold it when it was no longer needed, capital gains tax could be owing.
Of course, collecting the tax from someone off-shore can be difficult if not impossible, so the Income Tax Act makes a provision for the purchaser to withhold 25% of the purchase price unless a Clearance Certificate has been issued by CRA or “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada.” Generally a seller signs a “sworn” statement that he or she is not a non-resident of Canada (meaning the seller is either a permanent resident or citizen of Canada). Even if a statement is signed, it might not be recognized if you, the buyer, has ignored warnings that they may, in fact, be a non-resident.
There was a court case over the summer where a resident of California purchased a property several years ago and subsequently sold the Toronto condo. The seller was physically present in California on the completion date and signed a one-line statement that he was “not a non-resident of Canada for income tax purposes, nor will I be a non-resident on the completion date”. The Agreement of Purchase and Sale showed a California address to be used for document delivery. The judge in the case noted that the seller signed he had DECLARED he was not a non-resident. This was not a SWORN statement nor was it a SOLEMN DECLARATION. The judge further noted there were too many “red flags” to accept an unsworn statement and not to raise suspicion that this seller was not a non-resident. The purchaser was ordered to pay $92,000, which represented a whopping 25% of the $368,000 purchase price.
Most real estate transactions are closed by a lawyer acting on behalf of the seller, but a buyer should have their own lawyer as well. Make sure your lawyer requests proof of citizenship or permanent residency to eliminate your tax obligation on the purchase of your next home.