By Irina Sfranciog and Rachael Segal

In Canada, resident sellers of a principal residence are usually eligible for an exemption from the capital gains tax that would otherwise be triggered by the sale of a principal residence. Non-resident sellers must pay a capital gains tax of 25 per cent on the profits from the sale of a residential property.

In Mao v Liu (2017 BCSC 226), the court was asked to determine whether a notary public was negligent and therefore obligated to pay the capital gains tax triggered by the sale of a residential property. The negligent act in question was the notary public’s failure to confirm whether the seller was a Canadian resident.



The facts underlying the Mao v. Liu action were relatively straightforward. In the period following the execution of the Agreement of Purchase and Sale for a residential property, the lawyer for the seller was asked for but refused to sign a statutory declaration regarding the residency of the seller. Upon closing, with no clearance certificate and no holdback in the Agreement of Purchase and Sale, the Canadian Revenue Agency required that the buyer pay the capital gains tax owing in the amount of $695,000. The buyer then sued the notary public seeking damages associated with this payment.

This case turned upon the question of whether the notary public had a duty to make further inquiries to determine the residency of the seller and whether that duty was breached.

In the decision, Justice Affleck stated: “In my view the defendants agreed to make the ‘reasonable inquiry’… but failed to do so, and failed to advise the plaintiffs of their potential tax liability.” Ultimately Justice Affleck found the notary public liable to the buyers for the full amount of the capital gains tax triggered by the sale of the property.

The law is clear that buyers are required to be diligent and make reasonable inquiries to ascertain the tax residency status of sellers. If the buyer fails to make reasonable inquiries, the buyer and his or her agent can be assessed for the entirety of the capital gains tax.

Conducting fulsome due diligence at the outset of a real estate transaction cannot be disregarded, as the penalties for failing to do so can be significant. It is now possible that a court could find that notaries’ public and real estate duties go beyond general inquiries and must determine whether there are any potential liabilities for their clients. This duty puts the onus on both buyers and their agents and representatives to ensure specific inquiries are made that previous to this decision, would have been expected only from a lawyer.

Determining the residency status of the seller should be completed well before the closing date and should go beyond a simple conversation. It would be prudent for buyers and their agents to request that evidence of the seller’s residency status be a condition of the purchase. Alternatively, agents should also consider a clause in their retainer agreement releasing the agent of all liability associated with any unpaid taxes after “reasonable inquiries” have been made. The problem with this is that the purchaser, the party in the transaction who should be held at the lowest possible standard when it comes to assessing risk, would still remain liable to CRA for the unpaid taxes. While buyers are able to withhold a portion of the purchase price in situations where the seller is known to be a non-resident, an avenue to withhold part of the purchase price when the seller’s residency is unknown should be adopted as well.

Whether you are an agent or a buyer, the bottom line in buying real estate in Canada is to take extra precautions when purchasing from a non-resident. Be certain to ascertain the legal residency status of sellers prior to the closing date.

Copyright McCague Borlack LLP. Irina Sfranciog is an associate lawyer at McCague Borlack in Toronto. She practices civil litigation with an emphasis on subrogation and insurance defence. Her broad practice focuses on property damage, professional liability, product liability and civil fraud recovery. Rachael Segal is student-at-law at the firm. She received her law degree from the University of Leicester in the United Kingdom and her Masters of Law from Osgoode Hall law school. She has worked in a number of federal political offices including for two members of parliament, the government house leader, the minister of public safety and emergency preparedness and most recently, as director of policy to a Canadian senator.

9 COMMENTS

  1. In Alberta our standard residential purchase contract has a clause ( 6.1b ) which states that the seller ‘warrants’ that “the seller is not a non-resident for the purposes of the Income Tax Act (Canada)”.
    Is this not sufficient?

    • Les,

      I’m not a lawyer, and surely a lawyer wrote your locally used forms, but:

      I would underline it on your form; circle it, or highlight that clause using a yellow marker, and have everyone involved initial the margin area. Just a point of reference that all involved have committed the truth to the contract, and obviously could never say this subject was not drawn to their attention. Just my thoughts.

      Each transaction stands on its own legs, and rules and regs for complying vary jurisdiction to jurisdiction. But over all, it’s a federal issue in the end.

      The seller may have committed his full extracted equity thinking to apply it to his simultaneous purchase, only to discover a holdback has tripped up his concurrent transaction (affecting other people tied to grouped tied together transactions; the domino effect ).

      As much as we are fiduciary-duty bound to protect our clients, common sense says we must also protect ourselves and our brokerage ownership from any residual throwback.

      By doing such, and presuming you send a copy of the transaction to all involved once the APS is consummated initially, this will also alert the closing lawyer, and present support for the documents he is responsible for preparing.

      An ounce of prevention is always worth more than a pound of cure, as the old expression says.

      Cordially,
      Carolyne L 🍁

    • The highlighted area needs to be initialed by the first persons to sign any given contract. The others initialling the highlighted information are merely stating that they concur completely.

      And it opens the door for discussion that any agent should have skills to support. If the secondary persons signing the contract are requested to highlight the issue, first, drawn to their attention by their agent – remember that any change including initialled changes, following first set of signatures, negates the whole initial contract as it stands prior to accepted changes.

      The smallest change to any contract negates its authenticity. And you have to start all over again, opening the opportunity for the submitting changes persons to pack up and walk away in the interim.

      Often this non-resident status topic is overlooked by less than skilled agents, not realizing the potential quagmire that could suck up the contract like it had entered quicksand.

      Why make extra and or dangerous opportunities steal your transaction right out from under you from the get go? It’s such an easy fix right at the beginning.

      If the participants are unsure how to relate to the non-resident status, based on their or their spouse-status, by all means no one should sign anything until consulting their own lawyer first.

      Remember “you” could be liable to pay the non-resident status tax if you don’t get that topic completely out in the open initially. And, of course keep a paper trail in case you are called upon to pay.

      Often the line of least resistance is to try to force you to give up your commission. Regardless of whose responsibility you think it is, ultimately, it’s yours! To have proof you tried to initiate the conversation at the very least.

      By closing time the seller has possibly left the country. Chasing him down is a big undertaking so guess who gets to pay. YOU! can be liable.

      Depending on the complications involved, many lawyers don’t even have a good grip on the topic, but it’s best always to have them take on the government required responsibly to address and keep a proper trail. It’s not always easy and can prevent, or hold up, a tidy closing.

      Carolyne L 🍁

  2. I have been successful in avoiding the non-resident tax issue as well as GST owing on commercial property sales by getting an opinion from CRA prior to listing. This does not always guarantee a problem free transaction when the CRA is involved because an opinion is just that. We have had to go as far as getting a judgement in one case, that solidified the situation for all parties. this does take time and in the case of a hot residential market may not be feasible. The situation of non-resident status begs for some type of leadership from government, but don’t hold your breath waiting for that any time soon. The safest action in some cases is no action. If you can’t get answers that are concrete, walk away. No commission is worth risking you license for, or worse your reputation . If for some reason you are found liable, the law always seem to reach for the low hanging fruit, ie the realtors commission, there may be less then any commission coming your way.

    • Jim, as you can see, I wrote extensively at this REM topic a full year ago. One can guess by the lack of conversation on the forum that either REM readers have no interest or knowledge of the subject, or hope they never happenstance come across the debacle. Even if the topic is way over the heads of many REALTORS(r), one might think there would be some interest in learning more by discussion. Apparently not.

      Cordially
      Carolyne L 🍁

  3. But what if the seller says they are a resident and everything looks like they are: property tax bill, power bills, they have a local phone number. And then (later) it turns out they are not? What are we to do? I have no access to their immigration files. Who does?

    • That is a great question. Menno.
      As usual there’s no simplistic easy answer to discovering a likely end result — for the REALTOR(r). What exactly is the contagion?

      A good analogy might be the warning on board an aircraft that issues instructions to give yourself oxygen first, enabling you then to be able to help others, related or otherwise.

      I have never had to pull a LRO report with the express purpose of trying to determine non-residence status. I don’t even know if such status is even recorded at LRO at time of purchase registration filing for the (who has become the seller) buyer’s side. Lawyers are required to ask the question, and clients must sign appropriate paperwork. What does the lawyer do with that physical paperwork? And in fact, does the disclosure really matter to the listing and buying real estate agency….

      Is it sufficient that the lawyer does his work? The seller knows clearly that he either is or is not a non-resident.

      The topic begs other questions such as the relationship of residency to a matrimonial home: a single person buys a home; he or she is not a non-resident. A marriage takes place and the partner is a non-resident and becomes a name subsequently registered on title, not necessarily automatically but via specific matrimonial intent. A couple of years pass. They decide to sell the property and move out of the country, returning to the place of origin of the non-resident spouse. How is full disclosure arrived at if no one addresses the topic? Is the equity at time of sales apportioned? What if no cash input came from the non-resident?

      Aside from the lawyer doing his paperwork properly, who is going to protect the new buyer’s position, and that of the buyer agent, if the seller leaves the country not having disclosed?

      The case study referenced in the current REM article, without reading the case law, doesn’t tell us completely; but this link explains in some detail:http://www.step.org/news/canadian-notary-must-reimburse-buyer-stuck-non-resident-sellers-cgt-bill

      It seems that the notary who was closing that transaction failed to produce adequate status documentation. Where did the agent fit into the equation? Could the real agent have interceded? (Perhaps there wasn’t a REALTOR(r) involved in this particular transaction.)

      In a typical real estate transaction: Should the agent have interceded? Did the listing agent in the transaction just get lucky? The buyer agent? And likewise the buyer? Not having been thwarted with a possibility of having to pay, instead of the referenced notary?

      Which brings us to the question: is it ever the agent’s responsibility to ask the question: what is your residency status? Or just wing it, and leave it to the lawyers at closing to tidy up that area of paperwork? (Want to get paid?) Maybe my buyer and I, as well as the listing agents, got lucky, not having to pay the seller’s non-resident portion.

      There’s a possibility in my intervention described earlier, since everyone got so angry, that maybe the seller’s lawyer had no intention of providing the necessary documentation, or simply failed to ask his seller, that presumably is meant to be shared with the buyer’s law office. Or was it just fortunate that my buyer’s lawyer double checked?

      ====
      But I just confirmed with a Brampton real estate lawyer, what currently goes on re non-resident status “recording,” at LRO, if at all, in fact. These are his words: ” …… [InOntario] “The deed will now show if the buyer is a non-resident. There is a copy of the deed at the LRO but has to be pulled at the RO. The non-residency is for deeds registered after April 21, 2017.” (Interesting: Current information as at May 2017)

      I had asked: Does land registry even record non-resident status information when applicable (as at when the now would-be seller was the buyer? It didn’t matter when he was buying, but I wanted to know if status is recorded anyplace by the acting closing lawyers?) The topic genre historically it seems: only becomes important when he sells.

      QUESTION: does the topic matter if the non-resident is not leaving the country but is just buying another local property (as a non-resident)? Does his equity (original or increased) still become taxable if he stays inCanada, or only when he sells? Or only becomes a paramount topic if and when he leaves the country? And once again, how important or relevant is the topic to the agents involved in the process of title changing hands for a particular property?

      The case noted in the current REM article is atypical, but is concurrent with relocation transactions, with estate sales, and some matrimonial situations, and as stated, a forced sale, wherein no agency contracts are with “the real sellers or buyers” directly. Mostly there are no representations made of any sort, no guarantees, no warranties, and might be said to be of that nebulous term: processed “as is.” Sounds like maybe that explains what happened in the case referenced herein. An anomaly. But should serve as a warning to entities processing in this manner, that regardless of the agency status, this topic is worth going the extra mile to protect everyone concerned. Look at the date, and the time it took to process, legal fees, nerves, and frustrations galore, not to even speak of the countless unpaid hours of all involved in sorting out to get to the end result.

      Firstly, as I noted, perhaps the question needs to be vetted at the time of taking a listing, to avoid subsequent issues. There are those who will say it only matters in regard to a listing, but as you can see in my prior discourse, it matters to the buyer for whom the issue is vital, in that the buyer could find himself having to pay the seller’s non-resident tax (which appears to have been the original situation in the case law noted). WHOOPS! Did anyone tell their buyer that? The BBA fiduciary responsibly is … ? What exactly? And how can the agent protect his own position, in what otherwise could be deemed to be just another ordinary transaction. To say an agent “didn’t know” might not suffice in all instances “because ‘he’ was not required to ask.”

      Where is it written in a BBA, any requirement to forewarn a buyer of the distinct possibility in general, but especially with all the non resident property flipping going on in Canada contiguous with the rush rush rush of many multiple offer situations, where often a buyer feels compelled not to use common sense that he normally would engage?

      Should buyer agency contracts be highlighted in any manner in this regard? (BBA’s are a provincial ministry document.) Non resident status is a federal controlled situation, administered at both the provincial and federal level. It’s way more complicated than it appears at first glance. It’s a tax driven related subject that even some accountants don’t fully understand, relative to residential or commercial real estate.

      I wonder if there is any case law supporting that finding, regarding “agent to pay.” PED is a good researcher on such topical searches.

      But as I noted previously, the topic also presents the opportunity to thrust its blow at the agents at large, involved, finding them liable for paying the seller’s non-resident related tax as their buyer enjoys his new place non sequitur, even if the agency is in the form of a buyer contract. The sales rep’s fiduciary duty could be, and likely would be, called into question.

      Wouldn’t do any good to contact CRA because without clinical authorization that would be only the beginning of the untangling; they wouldn’t even take your call, as an outsider. Refer all declarations and disclosures (and non) to client lawyers or even at the very least, your office corporate lawyer, and hope he is familiar with non resident tax issues. RECO can’t help you with this topic.

      Often the topic would perhaps float to the surface in a discussion of a question asked of the seller by the would-be listing rep: “Why are you selling/moving?” I often advised in my consumer education articles, not to answer that question, because I always felt the answer has no bearing on the market value of the bricks and mortar and the underlying land, tied to other relative specifics regarding pricing the property properly to go to market; now, clearly, non resident status validation is an exception (and does not, or should not, affect value), but not affecting property value, the clear cut way to find out the seller’s current residency status is for a disclaimer/disclosure to be signed by the seller. At the time of signing a listing contract. The agent might be told it is none of his business. Be prepared. But historically I did not ask that question, letting the homeowner take the lead in that part of the conversation, gently guiding to get the needed information to achieve getting the listing in writing. Such additional conversation, including would they need my services in helping them purchase someplace to live after the sale, could be had subsequently, seeing as, in my opinion, the answer had nothing whatsoever to do with determining an asking price for the property. And that was my concentration at that particular point in time.

      Put the paper in front of him before you leave with your signed listing, and make sure he understands what he is signing. The net is wide open to capture “the agent” on the government fishing expedition. Like many areas of practising real estate, the industry is enveloping the agent in more and more specific policing required by government. Many topics before only handled in law offices. You don’t want to be accused of practicing law without a licence, so if the seller is not prepared to divulge, send him to his lawyer before processing his listing. Although your fiduciary duty is to protect your seller or buyer, you also want to protect your own licence. That was a hefty sum that the notary was found needing to pay, and costs were to be determined. Everyone looses. That’s an example case that no one can hope to win..

      If the seller refuses to disclose, of course there is your red flag. Or if he signs that he is “not” a non resident property owner (even if he is a non resident), one could think that would be sufficient evidence to let the buyer and the agents be relieved of the responsibility to pay. But the devil is always in the details.

      It might not stand as sufficient proof, and then again if the alleged non resident has left the country (Canada, in this case), who is going to chase him down in another country? What is the fallback position of the agent or his buyer in such a case? Questions beg more questions.

      With so many pieces of paper already apportioned to the consummation of a real estate transaction, what’s one more?

      Kind of surprised not to have seen much in print discussion about this topic, directly within out own area of expertise. Often everyone thinks agents are wealthy, so they present with the line of least resistance, in the eyes of those too blind to see. False assumptions prevail. Thinking real estate E and O insurance would not cover such a claim.

      Carolyne L 🍁

      • As well, things can get really complicated, regarding residency status – it can vary and it can change. A resident can become a non-resident. What many Canadians don’t even realise is that a Canadian can actually be deemed a non-resident. Conversely, a clear foreigner can be a resident.
        A real problem is also that one can become a non-resident between listing a home and the closing day. Who determines this? Who knows how to do this right? Do we need to leave something that involves so much money to guesswork?
        Asking the seller is not the solution. They often don’t even know or they might not be truthful. The seller will be “gone” after the sale and indeed, the buyer will be held liable – even when that’s completely unfair.
        And what if one of the owners is a resident and the other is not? Oh, what a can of worms this is.

  4. Regarding this most valuable REM article today, it is my opinion that a non-resident status acknowledgement must be a requirement as at the time of taking a listing.

    It is my understanding that both the buyer and the buyer’s agent, along with the listing agency (corp/rep) can be held not only accountable to have documented this information, but actually be held liable to pay the non-resident status tax owed. In 38 years I have not come across an agent who had had that discussion with their seller, or with their buyer, or noted the non-resident status on their listing. I’m sure there are some.

    The declaration needs to be noted, at the very least, in the remarks section of a listing. “This seller is a non-resident.” At the very least, that information would be a serious alert that any buyer agent showing the property could not deny having been informed at least in the most basic manner. (This head’s up REM article should alert any buyer rep to do their own due diligence, and so should their buyer.) At the very least, the agent should immediately notify their buyer’s lawyer, about to close the transaction, and should notify their buyer to consult immediately upon deciding to make an offer, with their lawyer. The buyer should include in the APS, an acknowledgement to be initialled by the seller, that he (and anyone else on title to the property who is/are non-residents), re-confirming fine print.

    First let me say that I have written permission to share this BC article, as received. I am on their important and valuable article BOR mailing list.

    http://www.bcrea.bc.ca/news-and-publications/publications/legally-speaking/legally-speaking—april-2017-(493)

    Several years ago, I had direct experience with this sort of situation. I showed a property and the sellers were home. The buyers and the sellers engaged in friendly conversation, during which it was discovered their reason for moving, although they loved their home and they loved living here for the duration of their home ownership, they had been transferred here from the USA and currently after a number of years, now had been relocated elsewhere, back in the United States.

    There was a desperate shortage of houses for sale at the time, and my “sold” buyers were wanting to secure a purchase pronto. This property fit their wants and needs list, and could accommodate their preferred closing, too.

    My buyers decided to make an offer, but wanted another look-see first. (I did not share that information yet with the listing rep.) It was a weekend showing, and the lockbox wouldn’t work. I called the franchise office to see if there was a way to access the lockbox for a second showing as per my second appointment, (before proceeding to type an offer).

    One of the two listing agents showed up to open up the stubborn lockbox. I had never had any business transactions with her, but she had worked in the office I was associated with at one time and was prone to hissy fits regularly. And she said to me while walking up the driveway, loud enough for my buyers a few steps behind, to hear: “I sure hope your buyers CAN AFFORD THIS PLACE!!! after dragging me over here to open the lockbox!!!” WOW! My buyers heard her.

    Of course her name was on the sign. They later told me they wouldn’t forget her anytime soon. (And they told two friends and they told two friends like always happens in such situations.) My buyers were totally disgusted and could not believe the rude behaviour, and her words within earshot. (It’s almost funny, because I think it worked out that the buyers were going to prove their point that they could afford the property (and I had their prequals in place) with a full price offer.) I had never worked with the loud agent and I actually put in a special office request to put the other half of the team who was a great rep and a fine person, to be the one to sit at the offer presentation.

    But during the overhearing of the engaging nice conversations in the kitchen while viewing, between the buyer and the seller, a little bell went off in my head…. hmmmm… American owner of Canadian property…. My brain screamed at me: Possible “Non-residence status.” I explained to my buyers as we were preparing the offer, the possibilities, and informed them that we should get that acknowledged, and did they first want to speak to their lawyer; they were afraid to miss out on the house with such a shortage of product availability; fortunately I had their lawyer’s home phone number, so I placed the call on their behalf.

    I had a conversation with their would-be lawyer on the transaction, who I happened to know well. I mentioned the non-residence status apparent, as told by the seller, situation and he said yes I was right to have discussed with the buyer.

    Although the lawyer was representing the buyers, not the sellers, indeed part of his closing apparatus was to check for such things, but sometimes the lawyer for the other side might get creative and not mention such (knowing it might hold up the seller’s equity indefinitely, slowing down the seller’s ability to close a stateside purchase on time).

    I had done the right thing, but a week or so before closing, Madame Lockbox scolder telephoned me, hopping mad! Her seller had complained that the buyer’s lawyer had had a conversation with the seller’s lawyer (I didn’t know that), and there was a wrinkle in the midst that might prevent the closing. She was furious! (I never did find out exactly what) and full of vitriol, she yelled through the phone: “who did I think I was, alerting the buyer’s lawyer that the house was owned by a transferred American of possible non-resident status.”

    WHAT had that to do with my having sold the house to my buyer??? she wanted to know. She let me know in no uncertain terms that the non-residence situation was none of my business (and she had not known about it); heck, the American was HER seller client! and she obviously had not discussed the situation in an alert and helpful fashion to put her seller at ease when she took his listing.

    None of us would have known this particular instance, but for the kitchen-conversation between the seller and my buyer, and of course I couldn’t help but overhear it; I did not partake in the conversation. But I wanted “everyone” protected, so I did MY homework.

    Of course all I could do was to refer the jumping up and down, swearing at me, listing agent to the lawyers involved if she wanted to discuss it further. I only knew that the seller had been forthcoming and honest in stating he was relocating out of Canada, having been transferred in a few years prior. I didn’t want any wrinkles for my buyer, (or for the seller) – or for us agents either, on the off chance anything untoward could affect the closing, not the least of which that any agent in the transaction could have been called upon to provide the non-resident tax owing.

    Everything closed on time and the buyer still lives in that house all these years later. Often I did such a good job finding the just right house for my buyers, that they literally never had to move again. EVER! But I often did business with Americans coming and going, and foreigners from overseas, as far away as Australia..

    I always gave them a head’s up and explained to them at length that they needed to discuss the “Canadian” non-resident status situation with their lawyer well ahead of making their own inward or outward bound plans, so that they, too, would not encounter surprises. I was often surprised how little they knew about owning property in a foreign (that would be here) country. They always were grateful we had such discussions out in the open. I never forgot that first possible problem encounter, that served to reassure me that it’s always better to get things like that out in the open and let the professionals deal with it.

    Members of the public read REM. This article should provide a head’s up to readers in general, and perhaps even to the press; something worthwhile discussing at length. And thank you also to the BC BOR who provides their legal articles regularly.

    Carolyne L 🍁

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