Non-Resident Seller and s.116 of the Income Tax Act – Tip for Sellers and Realtors
Note: This post, like all others on this website, is intended to be general information only and not legal advice. For further information, please contact your legal representative. In this particular scenario, advice from an accountant is highly recommended.
A critical issue that sometimes gets neglected at the signing of the agreement of purchase and sale is determining the residency status of the Seller. Sometimes we receive agreements of purchase and sale with the caveat that the Seller will not be physically present as they are relocating elsewhere prior to the closing date. As a realtor, or even the Seller of the property, this should set off alarm bells! It certainly does for us as legal representatives of the Seller.
Example:
Seller resides in the US but owns a rental property in Ontario which is now being sold;
Seller lived in Ontario but moved to the United Kingdom where she has recently accepted a job.
What’s the Issue?
Under the Agreement of Purchase and Sale, the Seller represents and warrants to the Buyer that the Seller will not be a non-resident of Canada (in other words, will be a Canadian resident) at the time of closing under the residency provisions of the Income Tax Act and provide a signed statutory declaration to confirm the same. However, if the Seller is unable to provide the declaration, then a holdback (withholding tax) of 25% of the sale price (or 50% if the property is a rental property) is required at the time of closing. That is correct, the holdback could be 25% (or more) of the sale price which can be more than the equity in the property. These funds are held by the lawyers until a clearance certificate is issued by the CRA laying out the tax liabilities. Needless to say, this can be a big problem resulting in a significant delay in receipt of funds by the Seller.
Why is this required?
The CRA’s requirements stem from the fact that if a non-resident disposes of the property and decides not to comply with their tax obligations, the CRA will then have some “security”. This is also the reason that the onus ends up being placed on the Buyer.
Some scenarios that may arise:
1. Seller provides a statutory declaration (not to be taken lightly) whereby Seller swears to the truth of the statement that the Seller is a Canadian Resident.
2. A holdback (25% or 50%) is maintained until a Clearance Certificate is provided after which the funds may be released to the Seller (less the tax obligations identified by the CRA);
3. This issue is spotted early and with the help of a CPA, a Clearance Certificate is obtained ahead of closing so that the Seller satisfies the Purchaser of complying with the Seller’s tax obligations. No holdback is required as a result.
Solution
We highly suggest that this issue be spotted at the outset – which is, at the time the property is being listed for Sale. This way, an accountant can be engaged in order to provide tax advice and in order to avoid an issue on closing. If not identified early on, a holdback may be required until the CRA provides the clearance certificate which can end up taking months and leave Seller without access to the funds!
A critical issue that sometimes gets neglected at the signing of the agreement of purchase and sale is determining the residency status of the Seller. Sometimes we receive agreements of purchase and sale with the caveat that the Seller will not be physically present as they are relocating elsewhere prior to the closing date. As a realtor, or even the Seller of the property, this should set off alarm bells! It certainly does for us as legal representatives of the Seller.
Example:
Seller resides in the US but owns a rental property in Ontario which is now being sold;
Seller lived in Ontario but moved to the United Kingdom where she has recently accepted a job.
What’s the Issue?
Under the Agreement of Purchase and Sale, the Seller represents and warrants to the Buyer that the Seller will not be a non-resident of Canada (in other words, will be a Canadian resident) at the time of closing under the residency provisions of the Income Tax Act and provide a signed statutory declaration to confirm the same. However, if the Seller is unable to provide the declaration, then a holdback (withholding tax) of 25% of the sale price (or 50% if the property is a rental property) is required at the time of closing. That is correct, the holdback could be 25% (or more) of the sale price which can be more than the equity in the property. These funds are held by the lawyers until a clearance certificate is issued by the CRA laying out the tax liabilities. Needless to say, this can be a big problem resulting in a significant delay in receipt of funds by the Seller.
Why is this required?
The CRA’s requirements stem from the fact that if a non-resident disposes of the property and decides not to comply with their tax obligations, the CRA will then have some “security”. This is also the reason that the onus ends up being placed on the Buyer.
Some scenarios that may arise:
1. Seller provides a statutory declaration (not to be taken lightly) whereby Seller swears to the truth of the statement that the Seller is a Canadian Resident.
2. A holdback (25% or 50%) is maintained until a Clearance Certificate is provided after which the funds may be released to the Seller (less the tax obligations identified by the CRA);
3. This issue is spotted early and with the help of a CPA, a Clearance Certificate is obtained ahead of closing so that the Seller satisfies the Purchaser of complying with the Seller’s tax obligations. No holdback is required as a result.
Solution
We highly suggest that this issue be spotted at the outset – which is, at the time the property is being listed for Sale. This way, an accountant can be engaged in order to provide tax advice and in order to avoid an issue on closing. If not identified early on, a holdback may be required until the CRA provides the clearance certificate which can end up taking months and leave Seller without access to the funds!
