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T

here is a clause in the standard promise to purchase that states that the vendor "is not a non-resident of Canada within the meaning of the provincial and federal taxation laws". While this double negative may reflect badly on our efforts to promote a positive self-image as Canadians, it really has very little to do with citizenship. It refers, rather, to whether the vendor is declaring an income in Canada, and as such is remitting the appropriate forms.

As a Canadian resident in this definition, the vendor is not subject to the obligation to prove to the purchaser that his income taxes are paid. A non- resident is an entirely different matter. Should a non-resident sell Canadian property, even though the title transfers to the purchaser with no adverse registries at the registry office, if you had any reason to believe that the vendor was a non-resident (say, for example, his address is not in Canada) then you may find yourself involved in his tax liability.

The vendor has an obligation to declare to the purchaser that he or she is a non-resident if this is the case. It is therefore important to know whether you are a resident or not.

A typical situation where this comes up is where a non-resident, non- Canadian buys and holds passive real estate, such as a house or land, for a number of years and then decides to sell it. Another situation is where the children are living and working in the States, so the parent takes up residence nearby. If the parent has no income in Canada, he or she may stop filing an income tax declaration in Canada. In this way, a Canadian citizen with no further income in Canada may be in the strange situation of declaring himself as a non-resident.

In either case, the vendor may have a beautiful country property in Ste. Agathe that has been in the family for 50 years. When it is sold, the notary will be obliged to withhold a large percentage of the price of the sale until the vendor can get a declaration from both income tax offices that there are no taxes outstanding either on the sale or otherwise.

The percentage that the notary will withhold will be based on a quick estimate of the taxable gain, however he is not limited to this amount and may hold back up to 51% of the price of sale. If he has reason to believe that there may be other outstanding income taxes, he will protect his purchaser by withholding the larger portion.

Assume that a piece of land sells for $200,000 and the vendor is a non- resident. Let us further suppose that the vendor paid $100,000 ten years ago. (The period of time may have no relevance unless the vendor can show why it does). The notary will estimate that, since 75% of the gain must be declared as income earned in the year of disposition (sale) then he will assume the highest tax rate, 52%, and the tax bill would be $39,000. The appropriate procedure is for the vendor to get a section 116 certificate demonstrating his personal tax situation.

The vendor may file income tax returns after the fact to justify a smaller amount, and the governments will return the difference to him or her, but in the absence of filing, the governments will keep the money.

If you risk becoming a non-resident, it is better to plan it with your accountant prior to the event. There may be ways that your assets can be arranged to modify your exposure. Ultimately, as long as you maintain even passive assets in Canada, it might be prudent to continue to file tax returns.

Prepared in consultation with Jan Holland of Wagar & Holland, Chartered Accountants. (613) 678-5846

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