Buying property from a nonresident? Section 116 obligations.
Taxes are an important component of any real estate transaction and can have far-reaching consequences on both Buyers and Sellers when they are not complied with. In today’s blog post, we will discuss section 116 of the Income Tax Act (the “ITA”) and why it is important for Buyers and Sellers to be aware of the obligations under it.
Under the provisions of section 116, a non-resident Seller, that is, a Seller who is not a resident of Canada (as defined in the ITA), must notify Canada Revenue Agency (CRA) of a disposition of a taxable Canadian property either before or within 10 days of such disposition. It is crucial to note that taxable Canadian property includes not just real property, but shares, trusts and some company interests as well.
This notice given by the Seller to the CRA is done using form T2062 “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property”. Once the Seller’s request is processed, they will be notified of the tax due to the CRA and a Certificate of Compliance will be issued to them after payment.
An important aspect of s. 116 is that it creates obligations not just on the Seller but also on the Buyer. In a case where the Seller does not have a Certificate of Compliance, the section obligates the Buyer to withhold a part of the purchase price, which is usually 25% or 50%, depending on the type of property. This is required if within 30 days after the end of the month the property was acquired, the Seller has not been issued a Certificate of Compliance.
Where there is failure to comply with the requirements under s 116, the Seller will be liable to various penalties. The Buyer can also be liable for the unpaid tax to the CRA. The Government of Canada gives more insight into the various penalties given for non-compliance here.
How can Buyers reduce their risk?
For Buyers to reduce their risk, it is advisable to make reasonable inquiry into the residency of the Seller. What will constitute reasonable inquiry depends on the situation. Buyers should also withhold 25% or 50% of the purchase price of the taxable property, where the Seller has not presented a Certificate of Compliance and the Buyer has knowledge that the Seller is a non-resident. Obtaining a sworn Affidavit of Residency from the Seller may also protect a Buyer from liability. An accountant should be contacted to confirm the amount that should be withheld in the specific situation.
Kau v The Queen
In the 2018 case of Kau v The Queen, 2018 TCC 156, a non-resident seller of a condo resided primarily in California and did not obtain a Certificate of Compliance from CRA before selling the property in Toronto. The buyer also did not withhold 25% of the purchase price as required under s. 116. The court held the buyer liable for $92,000, which was 25% of the purchase price, on the grounds that the buyer did not make reasonable inquiry into the residency of the seller.
As illustrated from the case above, buying real property in Canada is a major investment that must be approached with due care to avoid unnecessary liability. It is appropriate for Buyers and Sellers to consult with their lawyers before initiating any real estate transaction so that their interests are well-protected and unnecessary liabilities are avoided.
At Northview Law, we would love to discuss any questions you have about protecting your interests in your real estate transactions. You can book a free consultation with Northview Law on this link, or contact us at 416-639-7639. We look forward to hearing from you soon.