Know the Tax rules before buying from a Non-Resident Seller

With all of the talk about the new Tax on non-resident Buyers many people are overlooking the very serious problems that can be created by the long standing rules with respect to non-resident Sellers.

Paragraph 17 of the Standard Agreement of Purchase and Sale form provides that when dealing with the Sale of Real Estate by a Non-Resident Seller, the Buyer must withhold and remit Tax to CRA (or potential tax) arising from the Sale of the Real Estate in an amount equal to 25% or 50% of the Purchase Price depending on the nature of the Transaction. If the Buyer does not realize that he is dealing with a Non-Resident or, overlooks this requirement and pays the full Purchase Price to the Non-Resident Seller on Closing, the Buyer will be in for a devastating financial consequence. The Buyer will become personally liable to pay to CRA for failing to withhold and remit the Tax and can be made to pay the 25% or 50% of the Sale Price to CRA notwithstanding the fact that the Buyer has already paid the full Purchase Price to the Seller and that any tax liability was really that of the Seller to begin with. This is because it will likely be impossible to enforce or collect tax from the Non-Resident Seller living outside of Canada. The only way to protect the Buyer is to withhold the tax amount on Closing or compel the Non-Resident Seller to obtain a Clearance Certificate from CRA confirming the amount of tax owing, or that no tax is owing, so that the entire matter can be dealt with before Closing and before the full Purchase Price is paid to the Non-Resident Seller.

The bottom line is to know the Seller and, if you suspect that she/he may be a Non-Resident, alert your lawyer and leave sufficient time before the Closing Date (usually 45 days) to obtain the required Clearance Certificate from the Seller.