Seller Not There? Home Buyers Beware!

When Benjamin Franklin said that the only two certainties in life are death and taxes, the latter was definitely in reference to real estate. 

There are, of course, standard taxes and fees to be expected with each real estate transaction. For example, most purchasers are aware of the frustration that is land transfer tax, which is payable to the province every time a purchaser gains a beneficial interest in land. For buyers in Toronto, there is an additional land transfer tax payable to the municipality, as well as a land transfer tax administration fee, which, of course, is subject to HST - thereby creating a tax on a tax on a tax. 

Needless to say, part of making a smart home purchase involves either structuring the transaction in the most tax advantageous way possible. This can include measures such as taking advantage of a first-time home buyer’s credit if applicable, or at the very least being mindful of the forthcoming taxes to avoid any undesirable sticker shock on an already stretched budget. Yet there is a tax consequence for some buyers that is not widely known about, and if not handled carefully it can create significant challenges in a purchase. 

When a purchaser is buying a property from a non-resident seller, the Federal Income Tax Act states at section 116 that the purchaser may have to pay taxes of 25% (or in some instances as much as 50%) of the purchase price. The concept itself is not unusual - the tax is intended to ensure that the government is not denied tax revenues on the sale of a property simply because the previous owner did not reside in Canada. While the tax may sound steep, there are two primary exceptions to be aware of. The first is that the vendor can provide full information to the Ministry of Revenue such as the details of the property, the identity of the purchaser, the estimated proceeds from the purchase, etc. and once they have paid the tax of 25%, the vendor can obtain a certificate showing that this tax has been dealt with. 

Alternatively, the purchaser is not liable for the tax if “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada.” Thus in an ordinary purchase, the purchaser’s lawyer will usually request a statutory declaration, or a statement sworn under oath, that the vendor is not a non-resident of Canada. If the vendor’s lawyer is unwilling to provide such information for whatever reason, the purchaser’s lawyer will often advise that they ‘hold back’ 25% of the purchase price since it will most likely go towards the taxes laid out in section 116. 

Sounds simple enough so far, but what happens when the purchase is part of a power of sale? In foreclosure proceedings, the mortgagee (lender) takes full title and possession of the property, and the previous mortgagor (borrower) is no longer involved. Yet in a power of sale transaction, the mortgagee takes possession of the property, yet the mortgagor is still the owner on title for tax purposes. Thus when the purchaser is buying the property directly from the mortgagee, the Canada Revenue Agency has ruled that when it comes to the tax obligations in section 116, the residency status of the mortgagor still applies. 

If the purchaser is not dealing with the mortgagor and is dealing with the mortgagee in possession directly, then proving the mortgagor’s residency becomes a lot more complicated. The purchaser is still by law required to confirm the mortgagor’s residency, but in a foreclosure scenario the mortgagor may not be helpful, or may be entirely uncommunicative. In this case, the law requires that the purchaser makes a “reasonable inquiry” to confirm that the mortgagor is not a non-resident. There is no exact guideline as to what ‘reasonable inquiry’ means, but some examples include:

• Going through online telephone listings to locate an address;

• Google searches;

• Pressing the bank or mortgagor to obtain the vendor’s banking address;

• Questioning the realtor about the vendor’s address; and 

• Searching for their address at the Land Titles Office.

There is no singular way to confirm residency, but the key thing to remember is that in complex situations such as these, the onus is on the purchaser to take whatever reasonable inquiry steps are possible. Tax courts have historically ruled against purchasers who were found not to meet this ‘reasonable inquiry’ threshold, including receiving a statement from a mortgagor about their residency status which was not sworn under oath. 

Section 116 does not apply in every scenario, such as if the property is treaty-protected, or if it was legally transferred to a mortgagee by a court order of foreclosure (an ‘Order Absolute’), unless the foreclosure was used to avoid section 116 by quickly listing the property for sale. As these are not as common circumstances, the tax outlined in section 116 will apply to most transactions involving foreign-owned property. In turn, an understanding of the rules and their implications are key to avoiding a true financial mess. 

At our office, we work with you to guide you through your transaction step by step while leaving no stone unturned. Real estate agreements may look like standard template language, but understanding the fine details is what helps purchasers avoid these sorts of pitfalls. 

Contact us today to set up your appointment, and let us guide you through your purchase smoothly.