In residential conveyancing, there are numerous circumstances under which funds must be retained in trust after the transaction is completed, but none more onerous than that contemplated by Section 116(5) of the Income Tax Act (the “Act”). Therein, a non-resident of Canada is obligated upon disposition of real Canadian property to apply to Canada Revenue Agency (“CRA”) for clearance as evidenced by a certificate (“Certificate”). In order to be protected from potential tax liability, their purchaser will require receipt of same prior to closing or must holdback from sale proceeds an amount prescribed by the Act.
The calculation of the holdback is based primarily upon the use of the sold property and has no relation to the amount of the withholding tax, if any, expected to be paid. As a general rule, if the property was never income producing, having been occupied only by family members for personal use, the amount need only be 25% of the sale price. Alternatively, if the property was ever tenanted, the holdback must be calculated as 25% of land value plus 50% of improvement value, usually pro-rated from current assessed values to actual price. When the history of the property’s use is unclear, the latter will prevail.
Clearly, the impact of such a significant holdback can affect the viability of a transaction and should be addressed prior to listing. Vendors with any question as to their residency for tax purposes should first satisfy themselves in this regard, perhaps with assistance from an accountant. Once determined non-resident, another important consideration for a vendor will be whether their financial position could support both the required holdback and full repayment of a mortgage and/or other transactional obligations. If not, hardship provisions may apply and, under very limited circumstances, the Certificate can sometimes be issued within days and made available to the purchaser before closing, thus eliminating the need for the statutory holdback.
The takeaway here for both parties to a real property transaction is to identify the residency of the vendor as early as possible and to be alert to the implications of non-residency in Canada. The purchaser is obligated to make reasonable enquiry in this regard and the vendor must be prepared to represent their residency under oath or obtain clearance. Just another reason to work with an experienced real estate agent and conveyancing firm!
For a more complete discussion on this subject, my original article published in 2003 can be found at: https://www.notaries.bc.ca/
Additional relevant information is also available in the FAQ’s on our website under “Distance Clients”: https://marpolenotary.com/services/real-property/
and/or by contacting me directly at: firstname.lastname@example.org