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- Dealing with Non-Resident Sellers.
With the forthcoming clamp down on AirBnBs, I’m seeing a spike in non-resident sellers. Many realtors and sellers don’t realize the implications of a non-resident seller for both buyer and seller.
Implications for Buyers:
Under the Income Tax Act, the buyer is obligated to make reasonable inquiry as to the residency of the seller. Normally, that’s done right in clause 26 of the standard form Contract of Purchase and Sale and when the buyer’s lawyer gets a statutory declaration regarding the seller’s residency.
Failure to make reasonable inquiry could make the buyer liable for the entire capital gains tax. Always ensure clause 26 is completed.
Implications for Sellers:
When the seller is a non-resident, the buyer must either pay the appropriate tax directly to the CRA or ensure that the seller gets a “Certificate of Compliance” (sometimes called a “clearance certificate”) from the CRA. Getting this certificate takes 3-6 months after subject removal - and there’s almost never that much time between subject removal and closing.
If the certificate doesn’t arrive by closing day, then between 25% and 50% of the gross purchase price must be held back in the seller’s lawyer’s trust account. The exact amount depends on whether the property is considered depreciable or not.
Once the certificate arrives, the taxes are paid from the holdback and the Seller receives the balance. It doesn’t matter if the seller is selling at a profit or loss, the holdback applies until the certificate arrives.
How will the seller pay off the mortgage to clear title on closing day if 25% of their money is tied up on closing day?
A few months ago I had to ask my seller client for almost $100,000 in order to close their sale. Why? Because nobody did the math that their $800,000 sale, less commissions and the ~$650,000 mortgage did not leave enough to have $200,000 held back. Don’t let your seller clients be surprised on closing day by having to pay money to sell their property.
More info:
Please note - tax law changes all the time. The applicability of the info in this newsletter may change. Please talk to a tax accountant or lawyer before making any decisions.
Did You Know?
I offer real estate agents and mortgage brokers complimentary short phone consultations. Message me on WhatsApp, or book a call.
We are super transparent about pricing, check out our app at www.pricemyconveyance.com - it calculates property transfer tax, too!
Contrary to what people think, a lawyer is not more expensive than a notary. Remember that all lawyers are notaries, but notaries are not lawyers. In my experience, most notaries refer clients to a lawyer as soon as there’s a problem with a deal. Why not start with a lawyer?
A reminder that Arora Zbar LLP has 3 lawyers offering services in real estate transactions, corporate law, commercial litigation, tenancy/strata disputes, and estate planning.
Sincerely,
Eli Zbar
Lawyer
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