REALTORS® are obligated in Ontario to complete a Fintrac Report on your purchase or sale (rental) This consists of two valid pieces of ID used to IDENTIFY the transaction participant.
No where do I have access to verify if the seller of a property is a Resident or Non Resident for the purposes of Revenue Canada.
THE STORY
This is the case of Kau v. the Queen (2018 TCC 156). In June, 2011, Mr. Kau purchased a condo in Toronto from Mr. Y for $368,000. Mr. Y might have been a non-resident for Canadian tax purposes (he had a California address), although Mr. Y himself said that he was “not a non-resident.”
Why does this matter? Well, Section 116 of our tax law will require a purchaser of Canadian real estate to withhold 25 per cent of the purchase price and send it to the taxman if buying the property from a non-resident person. This is meant to ensure that non-residents who own and then sell Canadian real estate pay their share of taxes on any capital gains.
Section 116 requires the buyer to make a “reasonable inquiry” and have “no reason to believe that the seller is a non-resident of Canada.” Without this reasonable inquiry and belief about the seller, the buyer is supposed to withhold 25 per cent of the purchase price and send it to the taxman.
In our story, Mr. Kau didn’t withhold 25 per cent when paying Mr. Y. You see, Mr. Kau’s lawyer did ask about Mr. Y’s residency status. The response received was a signed affidavit that read “I am not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada) and nor will I be a non-resident of Canada at the time of closing.”
This “declaration” by the seller wasn’t good enough for the Tax Court judge, because it wasn’t a “solemn declaration” (which carries the weight of an oath). He concluded that Mr. Kau did not undertake “reasonable inquiry” and should have had reason to believe that Mr. Y was a non-resident.
The result? Mr. Kau lost his case, and must now fork over $92,000 (25 per cent of $368,000) to the CRA, representing the withholding tax that should have been deducted from the purchase price paid to Mr. Y.
THE NONSENSE
So, the onus is now on the buyer of real estate to not only collect taxes on behalf of the CRA when a non-resident is selling a property, but to also make a judgment on when to investigate further the tax residency of the seller – as though a layperson is qualified to know when and how to make that inquiry. https://www.theglobeandmail.com/investing/personal-finance/taxes/article-ensure-youre-in-the-clear-tax-court-decision-serves-as-warning-to/
So, in addition to collecting your fintrac data I am now required / should to protect my buyer make enquiries about Residency Provisions of the Home / Condo Sellers. This form is called the Individual Identification Information Record. See for yourself
Asking for your Drivers License with your home address is not sufficient. I followed this story 3 if not 4 years ago with this enquiry with Stan Gelman https://youtu.be/VP4wlqELB5g
