June 29th, 2015
As with the purchase and sale of most things these days, the buying or selling of a home involves the payment of tax. Not only are real estate transactions subject to land transfer tax and sometimes HST (harmonized sales tax), but there can also be income tax implications if the value of the home has increased while the seller owned the property. Ordinarily, that income tax liability is the responsibility of the seller, but it can also be the responsibility of the purchaser as well.
More specifically, where the seller of the property is a non-resident and the seller does not fulfill their income tax obligations, the buyer can become liable for the payment of the income tax if certain precautions are not taken.
For instance, the buyer is obligated by the Income Tax Act to make reasonable inquiries regarding the residency of the vendor. As is often the case with the law, ignorance is no excuse. Consequently, buyer's lawyer will get a statutory declaration stating that the seller is not a non-resident.
But what do you do if the seller is indeed a non-resident? Where the seller is a non-resident, there are other steps that a purchaser can take to protect themselves. The buyer's lawyer should require that the seller's lawyer withhold the amount of money for which the buyer would be responsible to pay if the seller fails to pay the tax. Currently, that liability represents 25% of the sale price of the property! Before that holdback is released, the seller should obtain and provide to the buyer a certificate from the Canada Revenue Agency exempting the property from any tax or verifying that all required tax has been paid.
The taxes payable on the purchase and sale of a residential property are complex and can be rather frightening. There are three separate taxes that may be payable: land transfer tax; HST; and income tax and they are not all paid by the same party to the transaction. On top of that, as demonstrated above, one side can be held liable for the payment of the other's tax obligations. As such, it is important that the sellers and buyers of residential properties know their tax obligations and take care to protect themselves.
Matthew Wilson is a real estate and land development lawyer in the London office of Lerners LLP. See Matthew's biography for more information about him and his work in the area of real estate and land development law or email him at firstname.lastname@example.org.
The content contained in this blog is intended to provide information about the subject matter and is not intended as legal advice. If you would like further information or advice please contact the author.