Non-Resident Sellers and Licensee Obligations
Earlier this spring, a newspaper headline got some licensees worried about possible tax liabilities when helping clients buy property from non-resident sellers. “House Buyer Beware: Landmark Court Ruling will Shake Real Estate Industry” ran the headline, causing many licensees to call the Council’s Professional Standards Advisors with questions about what this meant, and whether any of their responsibilities had changed.
Here’s the short answer to the question on everyone’s mind: the court decision does not create additional obligations for real estate licensees. Read on for more details and a special advisory to managing brokers.
Q: I read in the paper recently that because of a Supreme Court decision, real estate licensees will now be responsible for determining the residency status of property sellers. If they don’t, they may end up being liable for any non-resident withholding tax that a buyer has to pay. Is this true?
A: Here’s what a lawyer at the Errors and Omissions Corporation had to say about this, in an article for the British Columbia Real Estate Association newsletter, Legally Speaking:
“the court’s decision does not establish any new duties for licensees” with respect to ascertaining the residency status of sellers.
When property sellers are non-residents of Canada, they must pay a non-resident withholding tax on the sale of their property – and if they don’t, the Canada Revenue Agency may recover the tax from the buyers. In the case reported in the newspaper, the buyers had been assessed $695,000 in taxes by the CRA that the non-resident sellers should have paid. They sued, and the court found that the notary acting for the buyers had not made reasonable inquiries about the residency status of the sellers and had failed to advise them about any potential tax liability. The case is currently under appeal.
So what are a licensee’s duties with regard to the residency status of sellers?
Section 116 of the Income Tax Act requires a buyer to make “reasonable inquiries” to ascertain the residency status of a property seller. Ensure that you have done due diligence regarding the residency status of the seller before the completion date. Make sure that the sellers check either the residency or non-residency box on the Contract of Purchase and Sale when they sign the contract.
As a best practice, licensees should recommend that their clients seek legal or accounting advice about any tax issues and their purchase or sale of property.
Managing Brokers: Get Legal Advice Before Releasing Assignment Profits
When a Contract of Purchase and Sale has been assigned to a non-resident buyer, and the profit is to be paid from a brokerage trust account to the assignor before completion of the original deal, brokerages should seek legal or accounting advice on any tax issues before releasing funds. Licensees involved in such transactions should also advise assignees and assignors to seek legal advice. The assignment of a contract is a disposition of real estate under the Income Tax Act and is subject to the Income Tax Act withholding requirements.
Brokerages must also ensure that the assignment complies with all the regulatory requirements under section 8.2, Assignment of contracts for the purchase and sale of real estate, of the Real Estate Services Regulation. For more information on these requirements, see the Council’s Contract Assignment FAQ for Licensees.
Find more information
- Licensees Liable for not Determining Seller’s Non-Resident Status? Legally Speaking, April 2017
- Mao V. Liu, 2017 BCSC 226
- Section 116, Income Tax Act
- Non-Resident Tax Withholding Guide