In accordance with the provisions of Division D of the Income Tax Act, non residents are taxed upon the disposition of taxable Canadian property. The definition set forth in s.115 includes real estate.
Since the potential taxpayer is out of the country, the collection of any tax arising upon the sale becomes problematic. Consequently, the Canada Revenue Agency relies upon s.116 for assistance. This section imposes a liability directly upon the purchaser to report, collect and remit the appropriate tax.
Here is what the section says:
“Disposition by non-resident person of certain property
116. (1) If a non-resident person proposes to dispose of any taxable Canadian property (other than property described in subsection (5.2) and excluded property) the non-resident person may, at any time before the disposition, send to the Minister a notice setting out
(a) the name and address of the person to whom he proposes to dispose of the property (in this section referred to as the “proposed purchaser”);
(b) a description of the property sufficient to identify it;
(c) the estimated amount of the proceeds of disposition to be received by the non-resident person for the property; and
(d) the amount of the adjusted cost base to the non-resident person of the property at the time of the sending of the notice.
Certificate in respect of proposed disposition
(2) Where a non-resident person who has sent to the Minister a notice under subsection 116(1) in respect of a proposed disposition of any property has
(a) paid to the Receiver General, as or on account of tax under this Part payable by the non-resident person for the year, 25% of the amount, if any, by which the estimated amount set out in the notice in accordance with paragraph 116(1)(c) exceeds the amount set out in the notice in accordance with paragraph 116(1)(d), or
(b) furnished the Minister with security acceptable to the Minister in respect of the proposed disposition of the property,
the Minister shall forthwith issue to the non-resident person and the proposed purchaser a certificate in prescribed form in respect of the proposed disposition, fixing therein an amount (in this section referred to as the “certificate limit”) equal to the estimated amount set out in the notice in accordance with paragraph 116(1)(c).
Notice to Minister
(3) Every non-resident person who in a taxation year disposes of any taxable Canadian property of that person (other than property described in subsection 116(5.2) and excluded property) shall, not later than 10 days after the disposition, send to the Minister, by registered mail, a notice setting out
(a) the name and address of the person to whom the non-resident person disposed of the property (in this section referred to as the “purchaser”),
(b) a description of the property sufficient to identify it, and
(c) a statement of the proceeds of disposition of the property and the amount of its adjusted cost base to the non-resident person immediately before the disposition,
unless the non-resident person has, at any time before the disposition, sent to the Minister a notice under subsection 116(1) in respect of any proposed disposition of that property and
(d) the purchaser was the proposed purchaser referred to in that notice,
(e) the estimated amount set out in that notice in accordance with paragraph 116(1)(c) is equal to or greater than the proceeds of disposition of the property, and
(f) the amount set out in that notice in accordance with paragraph 116(1)(d) does not exceed the adjusted cost base to the non-resident person of the property immediately before the disposition.
Certificate in respect of property disposed of
(4) Where a non-resident person who has sent to the Minister a notice under subsection 116(3) in respect of a disposition of any property has
(a) paid to the Receiver General, as or on account of tax under this Part payable by the non-resident person for the year, 25% of the amount, if any, by which the proceeds of disposition of the property exceed the adjusted cost base to the non-resident person of the property immediately before the disposition, or
(b) furnished the Minister with security acceptable to the Minister in respect of the disposition of the property,
the Minister shall forthwith issue to the non-resident person and the purchaser a certificate in prescribed form in respect of the disposition.”
You will notice that under section 116, it is the duty and obligation of the non resident to report the proposed transaction in advance, post security for the amount of the tax, and obtain the clearance certificate for the purchaser. Perhaps, “duty and obligation” is not entirely appropriate. Certainly, it is at the very least the “role” of the non resident to deal with the matter in advance.
When this does not happen as it should, here is what the Income Tax Act says about the purchaser’s obligations and corresponding rights.
“Liability of purchaser
(5) Where in a taxation year a purchaser has acquired from a non-resident person any taxable Canadian property (other than depreciable property or excluded property) of the non-resident person, the purchaser, unless
(a) after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada,
(a.1) subsection (5.01) applies to the acquisition, or
(b) a certificate under subsection 116(4) has been issued to the purchaser by the Minister in respect of the property,
is liable to pay, and shall remit to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property, as tax under this Part for the year on behalf of the non-resident person, 25% of the amount, if any, by which
(c) the cost to the purchaser of the property so acquired
exceeds
(d) the certificate limit fixed by the certificate, if any, issued under subsection 116(2) in respect of the disposition of the property by the non-resident person to the purchaser,
and is entitled to deduct or withhold from any amount paid or credited by the purchaser to the non-resident person or otherwise recover from the non-resident person any amount paid by the purchaser as such a tax.”
So, what does that mean?
· If a purchaser acquires property from a non resident then this provision applies.
· Taxable Canadian Property, oftentimes referred to as TCP includes real property.
· There is a liability to pay a tax.
· There are three exceptions:
· 1) after reasonable inquiry there is no reason to believe that the person is not resident,
· 2) the non resident is covered by a tax treaty (this provision is new), or
· 3) the Minister has issued a certificate.
· Payment must be made in 30 days.
· Amount is calculated as 25% of the amount by which the purchase price exceeds the amount so specified in the certificate (if any).
· Purchaser is entitled to deduct or withhold from any amount paid or credited to the vendor, the amount so paid.
· Purchaser also has the right to recover any such amount paid as a tax.
So in many cases, section 116 will present problems. The purchaser needs proof of residency. An Affidavit of Residency is the usual document provided. It is executed under oath by the vendor confirming that he is not a non resident. It usually sets out tow time periods, the present and the time of closing.
The actual wording is often as follows:
“The vendor states that he is not now and will not be at the time of closing of this transaction a non-resident of Canada within the meaning of section 116 of the Income Tax Act (Canada).”
This creates somewhat of a problem since the Canada Revenue Agency has not specified exactly what evidence it will accept as a “reasonable inquiry”. This naturally suggests that if the vendor were in fact known to the purchaser, then the purchaser would be placed upon further or more detailed inquiry. However, in normal circumstances where the parties are unknown to one another, the Affidavit seems to be acceptable. Real estate practitioners have followed that custom and relied upon the CRA’s general acceptance of that document.
The new provision is designed to speed up the process in cases where there is an applicable tax treaty. But, this is difficult. Rarely, if ever, would a purchaser have sufficient and intimate knowledge of the business affairs of the non resident that the purchaser would be able to accept as a risk the application of an appropriate tax treaty.
That leaves us with the final option which is the Clearance certificate. So, if there is no certificate, then the purchaser will deduct 25% from the purchase price. If there is one already available, then the purchaser will withhold 25% of any amount over the limit.
It is not a defence to say that the non resident got all the money. If the purchase price was $1,000,000 and there was no certificate, then $250,000 must be withheld and remitted. Otherwise, the purchaser must come up with another $250,000 from his own money.
You will notice that the civil laws between the parties is amended accordingly. This applies in common law provinces and Quebec which has a civil code. The purchaser has a right to deduct the amount. It doesn’t matter what the contract says. And, if the purchaser pays his own money to the CRA, then he has the right to recover any amounts so paid.
This article is time sensitive. Tax laws change frequently, as did this section only a few months ago. It is only intended to address issues concerning the disposition of residential real properties in Canada. Commercial properties and corporations holding real estate as part of their portfolios is completely beyond the scope of this article. In such matters, the purchaser may be obligated to withhold 50% of the purchase price not 25%. Readers are cautioned to seek proper tax advice from a lawyer or tax accountant before undertaking such a transaction.
Brian Madigan LL.B., Broker