In a recent court case decision Kau, A. v. The Queen(TCC) Docket: 2014-1304(IT)G, Mr. Anibal Kau (Appellant) had appealed an earlier (February 20th, 2013) assessment of a withholding tax that was levied following purchase of a condominium in Toronto. The vendor, Mr. Mehran Yekta was from Danville, California, U.S.Aand not resident of Canada. This appeal heard in December 2017 before Honorable Justice B. Russell in Toronto was dismissed with costs. Clearly, not a good outcome for the Appellant. Why was this punitive outcome levied on the buyer and how one can avoid such costly errors.
How did the transaction with Anibal Kau fail? Mr. Yekta as a seller had not obtained a clearance certification from the Minister and further the legal representative of the buyer failed to deduct a withholding tax which is 25% of the gross sale proceeds that was due to be remitted to the Minister. Consequently, the buyer was held liable for the taxes as per the law.
Lessons learnt: This case revisits some key checklists that potential buyers and their professionals should be concerned about, especially, when the seller is not a resident of Canada. An important item is to ensure and verify the residency of the seller and never assume, mistakes can be expensive! If so, there are reporting, and tax withholding obligations and failures can lead to potentially punitive tax costs to the buyer. In the present case, for a property purchase price of $368,000 in 2013, tax compliance failures resulted in the Minister levying $92,000 on the buyer.
What steps can be taken to avoid a mis-step and costly tax penalties? Here are a few (is not to be considered exhaustive) of the buyer’s checklist that can help be compliant with the law and avoid costly tax errors.
Parties involved and residency: Identify all parties involved in the sale transaction and in particular, establish the seller’s residency status with respect to the Canadian tax system. The process of concluding on a residency can be complex and it is advisable to use tax and legal professionals who are familiar in dealing with such situations.
Sellers obligation: Obtaining a clearance certificate
- Is this a proposed sale with a future closing date in target? If so, has the seller already obtained a clearance certificate from the Canada Revenue Agency (CRA); the CRA requires at least 30 days prior to sale date to issue a clearance certificate. A copy of the certificate needs to be sent for the buyer’s record;
- Has the sale occurred? If so, you must inform the CRA by registered mail of the sale and remit the withholding tax amounts, no later than 10 days after the date of sale – there is a $25 per day of delay as penalty;
- Use a tax accountant with experience in dealing with clearance certificates.
- Have you made reasonable effort to establish the residency status of your seller? This can be complex to determine and use your professional tax consultant to clarify what is an acceptable standard for reasonableness for the CRA;
- If the seller is not a Canadian resident, is there a clearance certificate obtained from the seller? If not, has your legal representative communicated about this requirement?
- If the buyer has not received the clearance certificate, buyer is liable for the tax ownings under subsection 116(5) of the Income Tax Act. In simple terms, the buyer must communicate clearly to the seller (the legal representative of the seller) on a withholding tax on the sale price and the buyers tax liability;
- In the event the clearance certificate is not received, the buyer must withhold 25% of the gross sale price and this amount must then be remitted to the Receiver General of Canada.
Note that since there is no time limitation to the imposition of any buyer’s liability, the CRA can impose the taxes owing at any time when it becomes aware of the sale transaction. There are certain tax payer relief provisions available, but this is not automatic, and the Minister must consider the buyer’s circumstances to waive or limit the liabilities.
Limitation to buyer’s liability: There are circumstances where the buyer is not liable to withholding taxes; such as reasonable effort towards establishing seller’s Canadian residency, or the property is treaty protected or is an excluded property, or is a deemed disposition upon death etc. There can be other situations where there is no buyer’s liability. Please consult your professional tax consultant for more information.
Disclaimer:This article is only for information purposes and is not a substitute for an actual tax planning or to be considered as a tax advice. Any errors or omission is solely the authors responsibility. Always, contact your professional tax advisor before undertaking any action.
Author: Balaji Katlai PhD, CPA, CGAis an independent consultant and works from both Montreal and Burlington, and Niagara region. If you have any comments or suggestions, Balaji can be reached at firstname.lastname@example.org