Please read the disclaimer before perusing the following article.
written 1997, published in Beef in B.C. March/April 97
Every so often, one of my clients buys a ranch property from someone who is not a resident of Canada, or who is going to become a non-resident of Canada.
There are special rules about payment of tax on (1) sale proceeds going to a non-resident, or (2) mortgage interest going to a non-resident.
These taxes should be the problem of the non-resident seller or lender, right?
Well, maybe they should be, but they aren’t. Revenue Canada would much rather secure payment of tax from a Canadian resident than try and get it from a non-resident. So unless these taxes are properly dealt with, Revenue Canada will end up looking to the Canadian resident purchaser or borrower to pay the tax, on top of the purchase price or interest the Canadian resident has already paid.
I am trying to describe these rules simply and am glossing over the technical details. If you are buying property from a non-resident seller, OR you know that the seller is going to become a non-resident, get advice from a tax accountant or tax lawyer to make sure that all the Revenue Canada requirements are met.
The Income Tax Act obliges you, the purchaser or borrower, to make a reasonable inquiry to figure out if the seller or lender is a non-resident or is intending to become a non-resident. You are relieved from your obligations to pay the non-resident’s tax only if, on reasonable inquiry, you have no reason to think that the person is a non-resident or is going to become a non-resident.
Often it is obvious whether or not a person is a non-resident of Canada. When it is questionable, check with a tax accountant or tax lawyer.
This article refers to the rules about sale and purchase of land. For other types of property, check with your tax advisor.
The seller himself is supposed to take steps to clear the sale of taxable Canadian property before the sale takes place. If the seller takes those steps, he will have a certificate of compliance from Revenue Canada that confirms that the seller is cleared for a sale up to a certain (anticipated) price. If the transaction takes a different direction, the seller has to file additional material with Revenue Canada.
The amount that Revenue Canada secures from the seller is 33 1/3% of the proceeds of sale less the adjusted cost base of the property, or in other words 1/3rd of the capital gain on the property. The seller may be able to reduce the actual tax amount, because of a tax treaty between Canada and his country of residence.
What if the seller does not take these steps? Then the buyer of the property becomes liable to deduct, and remit to Revenue Canada, 33 1/3% of the sale price. If the seller did obtain a certificate from Revenue Canada, the buyer only has to deduct and remit 33 1/3% of the amount by which the cost of the property exceeds the certificate limit.
So if the seller does not get a certificate from Revenue Canada, OR if the sale price is more than the limit shown on the certificate, the purchaser becomes liable to contribute to the seller’s tax.
The payment of tax is due within 30 days after the end of the month in which the property was purchased.
In addition to being liable to pay up to one-third of the sale price to the government (whether it was withheld from the seller or not), the purchaser also becomes responsible to pay a penalty of 10% (for a “first offence”) or 20% (for a “subsequent offence”)—PLUS interest.
Let’s say you bought that ranch from a non-resident, and handled the payment of tax at the time of purchase just fine.
At the time of sale, the non-resident took back a mortgage for part of the purchase price, and you are making yearly payments which include principal and interest.
The Income Tax Act requires you to withhold, from each payment, 25% of the interest portion of the payment. If the non-resident is a resident of a country with which Canada has a tax treaty, then the percentage amount may be less than 25%. Check with your tax advisor.
If the Canadian resident borrower fails to deduct and pay this amount to Revenue Canada, the resident becomes personally liable for payment of the amount. Failure to deduct, report, and remit the tax may also give rise to penalties.
The best advice that I can give you in this situation, is see a tax professional for advice about your choices and best course of action.
You should figure out your exposure to tax, penalties, and interest if you (1) do nothing; (2) make a voluntary disclosure to Revenue Canada; (3) file as you were originally required to do.
Sometimes it may be possible to go to the seller/lender and recover money from that person to deal with the problem.
In other circumstances, Revenue Canada may be barred from collecting all the tax due to the passage of time.
If you discover the problem and decide to make a voluntary disclosure to Revenue Canada, their policy is not to charge you with tax evasion, and also not to charge penalties, only the tax and the interest. They often go back only 4 or 5 years.
But these alternatives can only be assessed with the help of a tax professional. Discussions with a tax lawyer are privileged; discussions with other tax professionals are not.