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.