Category Archives: Real Estate

Section 116 – Sale of Canadian Property by a Non-Resident

Anyone who has ever made an offer to purchase a property in Canada has likely come across some strange wording in the standard form agreement.  It goes something like this:

“The Seller represents and warrants to the Buyer that the Seller is not and oncompletion will not be a non-resident under the non-residency provisions of the Income Tax Act… and the seller shall deliver to the buyer a statutory declarationthat the seller is not then a non-resident of Canada.”

The reason for this rather convoluted wording is that the sale may trigger taxes payable by the seller to the Government of Canada.  If the buyer pays the full purchase price to a non-resident seller without regard to any taxes that are potentially owing by the seller, the buyer could become personally liable for the payment of any outstanding amount. This risk does not exist when the seller is a resident of Canada within themeaning of the Income Tax Act on the closing date.

If there is any doubt as to the seller’s residency status on the closing date, the buyer and the buyer’slawyer are obligated to ensure that the prescribed portion of the sale price is withheld from the selleruntil the Canada Revenue Agency (CRA) determines whether any taxes are in fact due and payable. The amount to be withheld is typically 25% of the sale price, though it can sometimes be as high as 50% of the sale price on revenue-generating properties. If it subsequently turns out that notaxes are owing by the seller, a clearance certificatepermitting the release of the withheld funds will beissued. If, on the other hand, taxes are indeed payable, then the appropriate amount has to be remitted to CRA from the holdback funds. Theprocess of securing a clearancecertificate is usually handled by accountants, and can take as long as 45days or longer to finalize.

Who is a Non‐Resident?

Determining the residency status of a seller is not as straightforward as one might think.  For example, the fact that the seller is a Canadian citizen, or is physically present in Canada, does not necessarily mean that he or she is a Canadian resident.  The buyer has an obligation to make reasonable inquiries to ascertain the seller’s residency.  Generally, an Affidavit of Residency, executed by the seller, provides sufficient protection. However, if there is any information concerning the seller that raises any doubt as to his or her residency, the purchaser cannot simply rely on the seller’s affidavit.

To sum up:

Section 116 of the Income Tax Act applies whenever a non-resident sells taxable Canadian property.  There is a liability to pay tax unless:

  • After reasonable inquiry, there is no reason to believe that the seller is a non-resident;
  • The non-resident seller is covered by a tax treaty between Canada and his/her country of residence; or
  • The Minister has issued a clearance certificate.

If none of the above exceptions exist, the applicable taxes must be paid within 30 days.

Practical Impact of Section 116

If a non-resident sells a Canadian property without receiving a clearance certificate, the purchaseris entitled to deduct or withhold the appropriate amount (usually 25% of the purchase price) from the amount otherwise payable or credited to the seller.  The purchaser also has the right to recover any such amount paid as tax.  If the seller has received a clearance certificate, then the purchaser will only be required to withhold 25% of the actual capital gain.Failing to withhold the requisite amount could be disastrous for the purchaser, who could potentially be liable for the seller’s taxes.  (It is not a defence to say that the non-resident received all the money).  In such a case, the purchaser’s only recourse would be to pursue civil remedies against the seller, who may not even have any assets left in Canada.

The Ins and Outs of the HST Rebate on New Homes

The HST rebate for new homes is available to anyone in Ontario who purchases a new home or condo from a builder (or who hires a builder to construct a new house), provided that certain criteria are met.  If you qualify for the rebate, you may be entitled to get back up to $24,000 of the provincial taxes paid, and up to $6000 of the federal taxes paid.

Who is entitled to the HST rebate?

The HST rebate was introduced to encourage home ownership by families.  It was never intended to benefit investors or corporations that are seeking to turn a quick profit from new home or condo purchases.  As a result, there are some stringent rules in place, and only those individuals who satisfy the criteria are allowed to benefit.

In a nutshell, the eligibility requirements for the HST rebate include the following criteria:

  • The purchaser must be an individual, not a corporation
  • The purchaser must have paid the HST to the builder when the purchase was made
  • The purchaser (or a spouse, parent, grandparent, or sibling of the purchaser) intends to use the home/condo as his or her primary place of residence
  • The purchaser must be the first person to occupy the unit.

The HST rebate is also available in some circumstances to a person who buys a new home but rents it out to a tenant immediately, for at least one year.  This rebate is known as “The Ontario New Residential Rental Property Rebate,” or “NRRPR”. Different rules apply to the NRRPR, and buyers seeking to benefit from this rebate should consult their legal advisor to ensure that they qualify for it.

How is the New Housing HST Rebate calculated?

Different rules apply to the federal portion of the rebate and the provincial portion, so the calculation can be quite confusing.  However, since the provincial portion of the rebate is significantly larger (it could be as much as $24,000, compared with a federal rebate maximum of $6,000), it is far more relevant.

Provincial Tax Portion

The amount of the provincial tax rebate depends on the purchase price of the property in question. If the purchase price is $400,000 or less, the rebate will equal 75% of the provincial tax paid. In other words, a buyer could potentially recoup $24,000.  Keep in mind, though, that the rebate is capped at $24,000, so even if you purchase a more expensive property, you will never recoup more than $24,000 of the provincial tax paid.

Federal Tax Portion

The amount of the federal tax (GST) rebate also depends on the purchase price of the property in question, though the maximum rebate (36% of the GST paid) is only available for homes that cost $350,000 or less. Homes that cost between $350,000 and $450,000 still qualify for a rebate, though the amount steadily decreases.  There is no rebate of the GST paid in respect of homes that cost over $450,000.

Overall, the maximum HST rebate (provincial and federal combined) that can ever be received is around $30,000. 

Some Food for Thought

Regardless of how much of the HST will be refunded, there are additional hurdles that a purchaser may encounter.  Canada Revenue Agency (CRA) has set out some stringent criteria that must be met before a purchaser will qualify for the HST rebate, and recent newspaper reports show that CRA is eager to identify people who are abusing the system.  For example, CRA may challenge a purchaser who has claimed the HST rebate on the grounds that the home/condo was not intended to be the purchaser’s principal residence.  In a recent case, a purchaser’s failure to change his address on record on his driver’s licence or OHIP card wasconsidered to be relevant.  As well, simply purchasing a few pieces of furniture and a toothbrush is not enough to convince CRA that the purchaser had a genuine intention to establish a principal residence at the new unit.  CRA needs to be reasonably convinced that the purchaser is not trying to use the system to make a few dollars while flipping the condo.

The lesson to be learned here is that buyers should clarify their rights and obligations regarding the HST rebate before entering into a new home/condo purchase.  Only if they intend to move in and make the new property their primary residence on closing, or if they rent it out for a full year after closing, will they be entitled toa rebate.

How the right real estate lawyer can save you money in the long run

For most people, buying a house represents the biggest investment they will ever make. It is not a decision that is taken lightly or often. Clearly, then, it makes sense to hire a lawyer to oversee the deal and protect the buyer’s interests. The importance of finding the right lawyer – someone who is well-versed in real estate law – cannot be overstated.

 

Here’s what the right lawyer can do for you:

1. Alert you to issues you may not have known about, so you can avoid costly mistakes and make an informed decision

EXAMPLE: Your lawyer discovers that the house you are about to buy is subject to a utilities easement in the rear of the lot. As a result, you will not be able to build the swimming pool you have always dreamed of, even though the lot appears to be big enough.

 

2. Ensure that you get good title to your property

EXAMPLE: Your real estate lawyer will do a comprehensive check of title to the property, to ensure that there are no claims registered against it. This could happen if, for example, the current owner had previously hired a trade to do work on the property, and then failed to pay for the work that was done. This might be recorded as a lien against the property, which would need to be discharged before the buyer could get good title.

 

3. Ensure that you don’t encounter any nasty surprises or expenses at closing

EXAMPLE: You have been looking for a condo for months now. Finally, you find a seller who purchased a new construction condominium unit from a developer, and wants to assign the unit to you. It is not clear whether you qualify for the HST Rebate for New Homes. Only a lawyer who is well-versed in the intricacies of the rebate program can protect you from unpleasant disappointments and cash flow problems, by making sure you are indeed eligible for the expected rebate.

 

4. Advise you how to take title

EXAMPLE: You and your spouse are not sure of the difference between taking title as tenants in common or as joint tenants. Your real estate lawyer explains the meaning of the terms so you can make an informed decision. At the same time, your friend suggested that you take title to your home in a company name. Your lawyer explains that this will prevent you from receiving the tax-free capital gain to which you would otherwise be entitled on resale, so you decide to take title in your personal name instead.

 

5. Help protect you against bad financing arrangements

EXAMPLE: Most buyers require financing in order to complete the purchase of their new home, so most buyers (and realtors) are accustomed to making their offer “conditional upon financing.” Unfortunately, this type of condition does not provide the buyer with sufficient protection: if the offer is only “conditional upon financing,” there is a chance that a buyer might qualify for financing at a burdensome interest rate, but would still be obligated to proceed with the transaction, since financing was – technically – available. The right real estate lawyer would ensure that the condition in the offer is worded in such a way as to provide the buyer with the maximum protection. He or she would also review your mortgage to make sure you are getting the best deal possible, and have no unexpected mortgage-related expenses at closing.

 

Overall, there are countless ways in which the right real estate lawyer can save you money. Don’t be penny-wise and pound foolish! Come to RKLaw, and let us guide you safely through the stress and challenges of your biggest investment. Then sit back and enjoy your dream home.

Choosing an Estate Executor, Trustee or Liquidator

How to choose an executor for settling your estate

Administering an estate can be an enormous amount of work.  For this reason, it is essential that you think carefully before you choose an executor (known as a “liquidator” in Quebec, and an “estate trustee” in Ontario).

Your executor – or executors – will be responsible for dealing with all your legal and financial affairs, and for ensuring that the provisions of your will are carried out.  Because of the time commitment this entails – not to mention the financial and administrative duties involved –
your executor(s) should ideally be someone:

  • you trust completely – such as a spouse, adult child, or close friend
  • who gets along with your other executors (if applicable), and who will deal fairly with all members of your family
  • who is of an appropriate age, such that he or she will be capable of serving as your executor when needed
  • who lives in the same province as you, preferably nearby (if possible)
  • who has the know-how, willingness, and time to be your executor
  • who will give you permission to name him or her as an executor in your will.

Because of all these considerations, many people – especially those with complex estates or blended family situations – choose to appoint a professional executor (such as a trust company) rather than a friend or relative.  This is usually a prudent decision.  It is also possible to have a relative or close friend serve as a second executor.

Of course, executors – whether individual or professional – are entitled to compensation for the significant amount of time and work involved in administering an estate.  Your will can therefore include directions as to how your executor(s) should be compensated.  (Your legal advisor should be able to provide guidance on any provincial standards or maximums).