Before owners decide to sell their apartment buildings, they should carefully consider various legal and tax considerations. Given its brevity, this article highlights some of the main items for vendors to consider before they list their apartment buildings.
Vendors are often surprised (sometimes horrified!) when they approach their closing date only to receive the payout statement from their current mortgage lender. Depending on the type of mortgage and owner has, payout penalties can range from zero to three months interest, or, in what can be the worst case, interest rate differential for the entire term. The costs can potentially be massive. The best thing for vendors to do is contact their lenders in advance. If the payout amount is too large, vendors may want to explore with their lenders the possibility of porting the mortgage or having a purchaser assume the mortgage.
Vendors should consult with their accountant regarding the tax implications of their sale. Capital gains are an obvious concern. There are two common pitfalls worth discussing. First, some sales may be deemed to be GST payable. While most apartment buildings are GST exempt, some exceptions apply and vendors should double-check each transaction with their accountants in advance. Canada Revenue Agency (CRA) place responsibility on the vendor to collect and remit GST. If a vendor fails to collect GST on a sale, the vendor will be held responsible by CRA. The second pitfall relates to sales made by non-resident vendors. Non-resident vendors are subject to a 25% to 50% sale proceeds holdback (held in trust until CRA issues a clearance certificate). The non-resident holdback can become a major problem if the vendor has a mortgage to pay out and the money needed is tied up in a holdback account (for weeks, if not months). Non-resident vendors should contact their accountants months in advance of a sale to limit the holdback hardship.
If a vendor has any concern that the property may be contaminated, selling it will not eliminate liability. In British Columbia, owners, tenants and other users of real estate are subject to joint, several, retroactive and absolute liability for contamination of land. In other words, a previous owner (who may or may not have contributed to the contamination), tenant or operator on the lands can be held responsible for clean-up costs and damages at a later date. If a prospective vendor is not completely confident that the land is clean, they are better off investigating the issue with a qualified professional, remediating the contamination and obtaining paperwork documenting such remediation.
As with any major transaction, it is always a good idea for a vendor to consider other options. Depending on the vendor's reason for wanting to sell, setting up a family trust or syndicating their interest in the property or properties (i.e. selling a share of their interest to other investors), it is best to speak with your lawyer and accountant regarding other options.
There are many other things to think about before you list your property, and it is beyond the scope of this article to discuss them all. The best way to prepare for any sale is to take your time, think through the deal and speak with your broker, lawyer and accountant.
This article was published in the Avison Young Point of View Multi-Family Investment Report British Colubia Q2 2009.