A B.C. Supreme Court ruling will send shock waves through the arm of the Canadian real-estate market that is powered by foreign capital, say immigration lawyers.
The ruling targets a weakness in Canadian laws that often leads foreign owners of real estate in cities such as Metro Vancouver and Toronto to claim they are “residents of Canada for tax purposes” when they are not.
The landmark B.C. decision requires notary public Tony Liu to pay his client more than $600,000 because Liu failed to adequately determine whether the Vancouver house his client was buying for $5.5 million had been owned by a tax resident of Canada.
As a result, the Canada Revenue Agency did not get paid, at the time of the sale, the 25 per cent capital gains tax it charges non-resident sellers of Canadian property on any profit they make on the sale.
So the CRA later demanded the buyer pay the $600,000 in tax. The buyer, in turn, sued Liu, arguing Liu failed to discover the seller was not a tax resident of Canada.
The CRA considers people who don’t live in the country at least six months a year and don’t pay income taxes here to be foreign property investors and speculators and thus subject to capital gains taxes.
Three Canadian immigration lawyers said the CRA tax-residency rule is often not enforced, even in overheated housing markets in Vancouver and Toronto that are in part fuelled by offshore money.
The complex ruling published this month by B.C. Supreme Court Justice Kenneth Affleck strikes to the heart of a gaping hole in Canadian tax, immigration and property-transfer law, say the immigration lawyers.
The B.C. decision is a stark warning to real estate agents, notaries and lawyers who fail to ensure that sellers of properties are truly tax residents of Canada, said David Lesperance, a tax and immigration lawyer based in Toronto.
“This truly is a game changer,” said Vancouver immigration lawyer Richard Kurland.
“It’s a precedent. Real estate agents can now get a knock on the door from the taxman, asking for the (capital gains) taxes that should have been collected by Ottawa, because the agent failed to make adequate inquiries.”
Sam Hyman, a Vancouver immigration lawyer, said the judge’s decision alerts purchasers to “the dire consequences” of making offers on properties sold by people who may be trying to avoid capital gains tax by falsely declaring they are tax residents of Canada.
Many buyers and their agents, Hyman said, are not being diligent in making sure the seller is a physical or tax resident of Canada, while others are being “cavalier” or “engaging in wilful blindness” about it.
The immigration lawyers urged the B.C. government to end the “honour system” that leaves it largely up to sellers to state on real-estate-industry forms whether or not they are residents of Canada for tax purposes.
They said the honour-system loophole could be fixed through Ottawa and Victoria agreeing to the sharing of information among the CRA, the federal Immigration Department and the arm of the B.C. government responsible for property sales.
The B.C. Liberals, Kurland said, have stubbornly refused to solve the costly problem by reforming the government’s property-transfer forms to require sellers to answer whether they are “a tax resident of Canada.”
The B.C. government, which last summer brought in a 15 per cent tax on foreign buyers to cool Metro Vancouver’s globalized real estate market, recently began to ask property sellers and buyers to answer, “What is your citizenship?”
But citizenship is “as irrelevant as eye colour,” Kurland said.
The issue that really matters to most Canadians and the CRA, he said, is tax residency, whether a home buyer or seller pays their fair share of taxes in this country.
All three lawyers say Canada is forgoing hundreds of millions of dollars in tax revenue by not enforcing the country’s tax-residency rules, which are designed in theory to give long-term residents an advantage over foreign nationals.
The lawyers said they hope the federal government – which this week pledged to “target high-risk international tax and abusive tax-avoidance cases” – will make it a priority for CRA to audit mansion owners who pay little or no income taxes.
It would be relatively easy for the CRA, Lesperance said, to conduct “lifestyle audits” on wealthy trans-national “astronauts,” also known as “ghosts,” who pay little or no income tax in Canada while financing family members to spend lavishly on expensive homes and cars in the country.
In some cases, Kurland said, dubious immigration professionals are advising clients they can “eat their cake and have it too.”
Some property owners, for instance, are claiming to real estate officials that they are Canadian residents, so they can avoid capital gains taxes while selling houses (and to ensure they qualify for permanent resident status).
But some of the same people, at the same time, are claiming to the CRA that they are not residents under our tax law, so they don’t have to declare their global income and property holdings, and pay income taxes on them in Canada.