The first time I broke the news to a New York lawyer that his client would not receive the expected sale proceeds at closing was a memorable experience. He launched into a profanity-laden tirade that culminated in a suggestion requiring a level of flexibility I do not possess. The experience could easily have been more memorable. Had I not taken the necessary precautions discussed below, our client might well have been stuck paying double for his property and I would likely have had to deal with a lot worse than some colourful language.
If you are buying Canadian real estate from a non-resident of Canada, you need to know that:
- while regimes vary by province, the withholding tax applicable to the transaction could be as high as 80%.
- while it is technically the Vendor’s obligation to remit non-resident taxes, the tax authorities will in certain circumstances pursue the purchaser if these taxes are not paid.
- at closing, you should always place in escrow the maximum non-resident tax amount payable on a deal, obtain comfort letters from the taxation authorities, and remit the amount set out in those letters directly to the authorities. If you do not put proper holdbacks in place, by the time you factor in the cost of the taxes payable plus costs incurred pursuing your vendor, you could easily end up paying double for your real estate. And if your vendor is a shell company, good luck recouping anything.
- you should insist that your purchase agreement contain a representation and warranty from your vendor that it is not a non-resident of Canada. If your vendor is a corporation whose name ends in something other than Ltd., Inc., or Corp., ask your vendor to provide proof of residency.
- you should check whether the property you are buying is mortgaged. If your purchase price is less than the outstanding amount of the mortgage plus the non-resident tax holdback, you won’t have enough escrowed funds to close your deal. There are a few ways out of that room. We recently did a deal in which the purchaser lent the vendor money so there would be sufficient funds in escrow at closing to cover the vendor’s mortgage and the non-resident withholding tax.
If you are a non-resident of Canada acquiring real estate in Canada, a lawyer can help you structure your investment so that you are not subject to any non-resident headaches down the road when it comes time to sell. If you are buying Canadian real estate from a non-resident, a lawyer can help you avoid buying one property for the price of two. The moral of the story: call your lawyer.