Imagine, for a moment, that you just negotiated terms to purchase a property for $5,560,000. Presumably, you would do some basic homework on the property. Perhaps it was a simple inspection, or maybe a more sophisticated engineering report. You may have even hired an appraiser. But after concluding it was the right property, you certainly wouldn’t be happy to receive an unexpected tax bill for $695,000.
That’s exactly what happened a few years ago when the Notary a buyer hired to conduct the conveyancing did not take reasonable steps to determine that the seller was a non-resident of Canada. As it stands, the Income Tax Act empowers the CRA to collect any unpaid capital gains or recapturing taxes from non-residents directly from buyer. In other words, if the seller doesn’t pay, the buyer does.
The Notary was sued by the purchaser and was ultimately deemed liable for the full damages, but the time, stress and uncertainty of obtaining a successful judgement cannot be understated.
Fortunately, there are steps you can take to eliminate this risk.
First, whenever buying commercial real estate in Edmonton (or buying any type of real estate anywhere in Canada), ensure there is wording in the purchase contract that specifically states the seller is a resident of Canada. If the seller indicates it is not a resident of Canada, sirens should start going off. And that’s not to suggest it is an insurmountable problem, but simply raise it as an issue that needs to be addressed.
An example of a clause to this effect can be found in the Alberta Real Estate Association’s Commercial Purchase Contract:
“The seller is not now nor, will it be on the Completion Day a non-resident for the purposes of the Income Tax Act (Canada) nor an agent or a trustee for any person with an interest in the Property who is a non-resident of Canada.”
Second, make any purchase contract conditional (amongst other things1) to having a lawyer review and approve the form and content. This is always sound practice regardless of whether or not there is reason to believe the seller might be a non-resident.
If the seller identifies themselves as a non-resident, the buyer (or more specifically the buyer’s lawyer) should withhold 25 – 50% of the purchase price, only to be released once a clearance certificate is issued by the CRA. In this event, make sure your lawyer and accountant are involved early and throughout the entire transaction. In practice, the buyer’s lawyer will hold the funds and their accountant deals with the CRA.
Purchasing real estate can be a great decision, but paying someone else’s taxes is not.
You may already be familiar with the term Caveat Emptor: Let the Buyer Beware, but we want to introduce you to a lesser known term called Caveat Lector: Let the Reader Beware. And while our Latin is strong (dare we say eximius?), it’s meant as a disclaimer for this post. We’re not lawyers or accountants, so this article (and our blog in general) should not be construed as advice in either of those fields. In fact, the best advice we can give is to make sure you get specific, relevant and competent advice from those respective professionals whenever and wherever commercial real estate is involved. We generalized for brevity, so ensure you discuss with these professionals in more detail. Lastly, we are based in Alberta, Canada, so this is information may be different in your market. This is known in Latin as Caveat Changus Locationus3
1 It is prudent for any real estate buyer to make a potential purchase subject to a general due diligence condition. This allows for a buyer to consult with any relevant professionals and commission any necessary reports pertaining to the property. This can include obtaining an appraisal, environmental site assessment and a building condition assessment, but it shouldn’t stop there. Use this time to ensure that the zoning is compatible for the intended use, ensure building electrical and mechanical systems will meet your needs, and also obtain advice from both a lawyer and an accountant.
2 We have no empirical evidence to prove that our disclaimer is the world’s greatest blog disclaimer, but if you’re reading this far, our work here is done.
3 Not an actual Latin term. See Caveat Lector.
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
EdmontonCommercial.com offers expert analysis and research in a weekly blog along with resources for landlords, tenants, sellers and buyers in the market. Seeking to buy or lease? We track every property available for sale and for lease in Greater Edmonton. Get the latest news and check the latest listings—anytime.