Little known capital gains tax rule could hit buyers

As most of us know, the real estate market in Ontario has changed over the last few years with the arrival of more buyers and investors from outside of Canada.

Some of these buyers may split their time between living in Canada and another country or have family living in both Canada and another country, which can result in them being deemed as a non-resident for tax purposes. This status makes them subject to different taxation rules than residents.

If you’re a resident of Canada, you have to pay tax in Canada on your worldwide income — meaning any income earned either inside or outside Canada. Non-residents of Canada, however, are required to pay tax in Canada only on income that is earned from a Canadian source. Employment income, income earned from a business carried out in Canada and capital gains earned on Canadian real estate must be reported on a Canadian tax return and are subject to the payment of tax to the Canadian government.

This non-resident status becomes relevant to the purchaser of a resale home when the seller of the property is a non-resident who fails to pay the capital gains tax owed on sale of their Canadian property. When the Canadian government is unable to collect tax on the capital gains from a non-resident — perhaps because they have left the country — there is a special part of the legislation that allows the government to look to the purchaser to pay the capital gains tax that is owed.

While most buyers are likely not even aware of this rule, they need to learn about it because of the potentially significant financial impact it could make on their purchase.

The impact of this is only starting to become known as more non-residents of Canada start to sell properties they have purchased in Canada.

So how can a purchaser protect themselves and find out if the seller’s permanent residence is not in Canada? One red flag would be if on the agreement of purchase and sale, the contact address of the seller is outside of Canada or if there is any other indication on other documentation or even in conversation that this could be the case.

But the best advice is to ensure that you work with a qualified real estate lawyer when it comes time to do the paperwork on the purchase of your home.

The lawyer should ensure that the seller provides a declaration made under oath confirming they are not a non-resident. Or if the seller is a non-resident, your lawyer needs to obtain a clearance certificate from the seller, which clearly indicates that the Canada Revenue Agency and the non-resident have made appropriate arrangements to pay the tax on the capital gains made on the sale of the property.

Canada Revenue Agency puts the onus on the purchaser to take prudent measures to confirm the seller’s residence status. You and your lawyer should investigate any hint or question of residency prior to closing a real estate transaction. A partial holdback of payment by your lawyer on closing is one way to protect yourself if you have valid concerns.

Sue Wastell is the president of the London Home Builders' Association and Owner of Wastell Homes in London.     

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