The Invisible Handshake: Navigating Canadian Real Estate with Non-Resident Sellers

Disclaimer

This article is intended for informational purposes only and should not be considered as legal or tax advice. For tailored legal or tax guidance, please consult a qualified professional.

Why Residency Status is the Secret Sauce

In Canada, your tax obligations are intricately tied to your residency status. Non-residents are only taxed on income earned within Canadian borders. When selling Canadian property, they must notify the CRA within a 10-day window post-sale. Failure to do so can result in penalties, and the CRA may go after the buyer to collect the tax.

The Seller's Playbook

For non-resident sellers, obtaining a Section 116 Certificate is more than just a formality; it's a necessity. This certificate acts as a shield, protecting the buyer from future tax liabilities related to the sale. The application process involves submitting a notice of the proposed disposition and either paying an amount to cover the potential tax or providing appropriate security for it. Delays in this process can not only disrupt the transaction but may also result in the buyer having to withhold up to 50% of the purchase price.

The Buyer's Guidebook

As a buyer, you have a legal obligation to ensure that the non-resident seller has complied with the CRA's requirements. If a Certificate of Compliance is not in place, you must withhold up to 50% of the purchase price and remit it to the CRA. This isn't a negotiable term; it's mandated by the Income Tax Act. Failure to comply can result in you, the buyer, being liable for the seller's tax.

The Grey Area: "Reasonable Inquiry

What constitutes a "reasonable inquiry" into the seller's residency status? The CRA evaluates this on a case-by-case basis. Factors like the seller's address, place of employment, and even the location where documents are signed can serve as indicators. If you have any doubts, it's better to err on the side of caution and withhold the required amount.