Purchase of property from a non resident – ADEQUATE INQUIRY

In a July 31, 2018 Tax Court of Canada case (Kau vs. H.M.Q., 2014-1304(IT)G), the taxpayer purchased a condo from an apparent non-resident of Canada without withholding any amounts for tax. The vendor did not obtain a Section 116 Clearance Certificate authorizing reduced withholdings, so the purchaser was assessed on the basis that they should have remitted 25% of the purchase price to CRA.

At issue was whether the taxpayer or his solicitor acting on his behalf made “reasonable inquiry” which resulted in no reason to believe that the vendor was not resident in Canada (Paragraph 116(5)(a)). If reasonable inquiry had been made, the taxpayer would not be liable for the withholdings.

Taxpayer loses

While the taxpayer’s solicitor obtained an unsworn affidavit from the vendor who declared before a notary public in California that “I am not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada)” it was insufficient to constitute “reasonable inquiry” due to other red flags in the transaction.

Such red flags included a “service address” of the vendor in California, the vendor not residing in the condo he was selling, and the vendor having the same “service address” when purchasing the condo two years prior. Reasonable inquiry entails consideration of not just what was asked but also of responses received. In this case, follow-up questions would have been appropriate. The Court further suggested asking the question of what was the vendor’s permanent address, in addition to requesting a copy of the vendor’s driving licence.