Buying$250K Tax Trap Home Buyers Rarely See Coming
Imagine closing on a home, moving into your new living room, and then receiving a letter from the Canada Revenue Agency about $250,000.
You didn't sell the house.
You didn't make the profit.
But suddenly, there's a tax issue connected to the transaction that you never expected.
This is one of the risks buyers should understand when purchasing a property from a seller who is non-resident for Canadian tax purposes.
Under Section 116 of the Income Tax Act, special rules apply when a non-resident sells Canadian real estate. If the required steps aren't properly addressed, the buyer can potentially face significant financial exposure.
The catch most people miss Tax residency isn't the same as citizenship.
A seller can have a Canadian passport, a Canadian driver's licence, and strong family ties in Canada and still be considered a non-resident for Canadian tax purposes.
That's why it's important to address residency before closing, rather than assuming everything is fine.
For example, on a $1,000,000 property, the general withholding rate in these circumstances can be 25% of the purchase price.
That's potentially:
$250,000
You don't want to discover an issue like that after you've already received the keys.
How to protect yourself?
- Address the seller's residency early
The purchase agreement and closing process should properly address the seller's residency status and obtain the appropriate declarations and documentation.
- Address the required withholding where applicable
If the seller is a non-resident, the buyer's lawyer will ensure any required funds are withheld and handled in accordance with the applicable CRA requirements, including obtaining the necessary documentation before funds are released.
Your realtor and real estate lawyer should work together to ensure these protections are properly addressed during the transaction.
Real estate is more than finding the right house. It's also about making sure you're protected from financial surprises before you close.
If you're planning a purchase or want to know what questions you should be asking before putting in an offer, reach out to us for guidance along the way!
Happy browsing!