Non-residents Selling Canadian Real Property
Monday May 1st is generally the filing tax deadline in Canada for individuals for the 2016 year1. It is also 8 days away from a provincial election in British Columbia. One of the many issues politicians face in urban centers in BC is housing, both high prices and low availability. Some politicians have suggested that the BC government take measures to fight tax cheats who purchase and sell property in BC without paying income taxes2. This includes non-residents selling Canadian real property.
Graeme Wood of the Richmond News asked for my opinion on this issue3. While an important issue, I told Graeme that enforcement of income tax law isn’t a provincial matter but a federal one that impacts all Canadians. I further stated that Canada Revenue Agency can do more to enforce existing tax law in this area.
Sales of Canadian Real Property by Non-residents
Under Canadian income tax law, a non-resident of Canada selling Canadian real property is subject to Canadian income tax on any gain on sale. Generally, Canada has a self-assessing tax system that puts individuals on the honour system to file any required Canadian income tax returns and pay any Canadian income tax liability. To assist with compliance, Canadian tax law requires buyers to inquire whether the seller is a resident of Canada or not. If the seller is a resident of Canada, no tax is required to be withheld on the sale proceeds. If the seller is not a resident of Canada, 25% of the gross proceeds is required to be withheld by the buyer and remitted to Canada Revenue Agency. The 25% tax is not a final tax, but a temporary withholding tax. The seller can request a reduction or refund of some or all this withholding tax by filing applications and Canadian income tax returns showing the correct amount of the gain or loss and calculating the final Canadian income tax liability.
Canadian income tax law requires the buyer to make a “reasonable inquiry as to the residency status of the seller”4. The Canadian income tax act doesn’t define what a reasonable inquiry would be in this situation. In fact, it would be quite difficult for any buyer to determine whether the seller is a resident of Canada for income tax purposes on the date of sale. Income tax residency determination for individuals who spend significant periods of time in more than one country is a complicated area involving a review of the facts, analysis of Canadian and foreign country income tax law, research of court cases and tax rulings and detailed reading of income tax treaties. Even showing the buyer the seller’s most recent Canada Revenue Agency notice of assessment isn’t conclusive since such document only shows residency up to December 31st of the year prior to sale. A seller may have ceased Canadian residency after the date of the CRA assessment notice but before the sale date of the property. Residency determination is far beyond the capability of an individual seller of Canadian real property and/or their notary or real estate lawyer.
For these reasons, where the buyer makes an inquiry whether the seller is a resident of Canada and receives signed confirmation from the seller that they are not a non-resident of Canada, CRA generally accepts that reasonable inquiry has been made and no Canadian tax is required to be withheld.
Court Case – Failure to Follow Canadian Tax Law
A recent BC Supreme Court case found a local Vancouver notary liable for approximately $600,000 of withholding tax5. In this case, the notary made the reasonable inquiry request on behalf of their client but never received written confirmation that the sellers were not non-residents of Canada. This refusal came about as the seller was a third-party creditor that represented a group of sellers and the creditor could not confirm the residency of all the sellers. Rather than withhold the 25% tax on the sale, the notary closed the transaction, withheld no tax and paid the full proceeds to the sellers. One of the sellers was a nonresident of Canada and the buyer was assessed the tax by the Canada Revenue Agency for failure to withhold tax on sale. The buyer successfully sued the notary for damages for failing to perform the agreed duties under the terms of engagement which included making the reasonable inquiry required under Canadian income tax law and fulfilling the withholding tax requirement.
While on the surface it is a scary result for anyone involved in completing real estate transactions, the notary could have avoided the problem by simply withholding 25% tax from the gross proceeds and remitting it to Canada Revenue Agency. The refusal of the sellers’ representatives to provide written confirmation on residency should have been a warning sign. This was an expensive lesson.
A Dishonest Seller Escapes Canadian Tax
The concern to all Canadians is the misrepresentation by the seller of their residency status and the inability of Canada Revenue Agency to track them down to pay any Canadian income tax liability. The buyer is not required to examine or verify the statement by a seller that they are not a non-resident of Canada. A seller may be conducting all business out of Canada, may show a non-Canadian address on their documents and may even request the funds be transferred immediately outside Canada on sale. Despite all these facts, so long as the seller represents in writing to the buyer that they are not a nonresident of Canada, the buyer does not need to withhold Canadian income tax. Canada Revenue Agency is left to track down the seller with little information.
Assisting Canada Revenue Agency to Enforce Canadian Tax Law
While provinces establish their own income tax legislation, administration and enforcement of Canadian income tax law is generally the responsibility of the Canada Revenue Agency, a federal government agency. All provinces are impacted by dishonest nonresident sellers and tax cheats, not just British Columbia.
Canada can borrow a page from the United States to assist in enforcement of nonresident sellers of Canadian real property. Under the US’ Foreign Income in Real Property Tax Act, a buyer is required to withhold U.S. federal income tax on the gross proceeds on the sale of U.S. real property by a non-U.S. person unless exemptions exist. Where the seller cannot provide a US Individual Taxpayer Identification Number or a Social Security Number, the withholding tax is remitted to the Internal Revenue Service, forcing the seller to file a U.S. federal income tax return to reconcile the gain amount and final tax with the withholding tax already paid. Furthermore, representatives from the buyer, often notaries or escrow agents, provide information to the Internal Revenue Service on each sale by a non-U.S. person including name, address and amount of gross proceeds. This requirement provides the Internal Revenue Service with the information needed to enforce U.S. federal tax law on non-U.S. person sellers. Some states have similar requirements.
Canada should require sellers to provide to the buyer their Canadian Social Insurance Numbers or Taxpayer Identification Numbers else the buyer be required to withhold 25% tax on the gross proceeds. Furthermore, Canada should require buyers to provide information directly to Canada Revenue Agency on the identity of the seller and the gross proceeds of the sale. Canada already requires financial institutions to report information on recipients of investment income and requires employers to report wages paid to employees. Why not extend the requirements to purchasers of Canadian real property? These requirements won’t eliminate tax cheating completely but will provide information to the people that can best enforce Canadian tax law.
- 1 Self-employed individuals resident in Canada have until June 15th to file their income tax return.
- 2 http://vancouversun.com/business/real-estate/douglas-todd-how-to-ensure-non-residents-pay-tax-on-canadian-real-estate-profits
- 3 http://www.richmond-news.com/election-2017/housing-ndp-and-greens-tackle-money-laundering-and-tax-evasion-in-richmond-1.17102892
- 4 Subsection 116(5) states that a buyer is not required to withholding income tax on a purchase from a seller if “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada”
- 5 http://www.courts.gov.bc.ca/jdb-txt/sc/17/02/2017BCSC0226.htm