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What should have been a joyous occasion for new homeowners in Vancouver turned into the focus of a messy lawsuit, resulting in a costly court ruling that potential homebuyers should be aware of.

“The last thing you want to do is have to deal with this,” says Alex Stojicevic, co-founder and immigration lawyer at Vancouver law firm Maynard Kischer Stojicevic.

The recent ruling by the BC Supreme Court calls for notary public Tony Liu to pay his client, the homebuyers, more than $600,000, after being found liable for insufficiently determining if the seller of his client’s Vancouver home was a tax-paying resident, before completing the real estate transaction.

According to the judgement made in February by Justice Kenneth Affleck, the homebuyers purchased a home for over $5.5 million but after closing, the Canadian Revenue Agency (CRA) told the new homeowners they owed $695,000.

Since the previous owner was not a tax-paying resident, the new homeowners were now on the hook to cover the federal capital gains tax on the property.

In turn, the homebuyers sued Liu for not adequately determining the seller’s residency at the time of purchase.

Stojicevic says “there’s nothing in this decision that is groundbreaking,” but going forward more action is required to uphold federal regulations surrounding the identity of one’s tax residency.

“I think there’s going to be a natural progression here in terms of more enforcement of existing law,” he adds.

In a standard real estate transaction, it is the responsibility of the buyer to determine the seller’s residency status, in order to avoid the 25 per cent capital gains tax applicable to the property of non-resident sellers under the Canadian Income Tax Act.  

But in most cases, homebuyers have a notary or lawyer to undertake this responsibility and send a statutory declaration form to the seller, confirming they are a resident of Canada for tax purposes.

“If taxes are paid or appropriate security is obtained by the CRA from the non-resident vendor, the CRA will issue a certificate of compliance,” says the CRA in an email statement to BuzzBuzzNews. “If not, a buyer may be held liable for the payment of taxes on the non-resident vendor’s disposition of the property.”

However, this case points out a flaw in the real estate transaction process that relies on sellers to be honest about their citizenship regardless if they pay Canadian property taxes or not.

On most real estate industry forms, it asks the seller what their citizenship is, not specifically if they are a tax-paying resident, says Stojicevic.

But, “[i]f you’re a Canadian citizen it doesn’t mean you’re a resident for tax purposes,” he adds.

Simply obtaining the seller’s citizenship is not sufficient proof that they are paying applicable property taxes and exempt from the 25 per cent tax, however up until now many legal representatives have relied on just acquiring the seller’s citizenship to fulfill the federal requirements, says Stojicevic.

“It could be easily done where a seller could mislead a buyer about their tax residency,” says Tony Spagnuolo, founder and real estate lawyer at BC real estate firm Spagnuolo and Company.

In regards to Liu’s court case, it was a unique negotiation as the property sold was a foreclosure handled by a bank.

“The seller was not involved in the sale, it was the bank who had conduct of sale and the bank refused to sign the stat dec [statutory declaration], rightly so,” says Spagnuolo.

When the bank refused to backup the seller’s identity, Spagnuolo says Liu should have taken extra steps to ensure the capital gains tax was dealt with before closing the deal.

“The notary involved just basically didn’t do enough due diligence to make sure that the seller was a non-resident,” says Spagnuolo.

In many real estate transactions, if the CRA can’t provide a clearance certificate stating the seller is a tax-paying resident by closing, it’s common practice for a buyer’s lawyer to request a 25 per cent holdback of the sale price, just in case the funds need to be paid out.

“In all likelihood that would have relieved the notary of his obligations and [he] probably would not be liable at that point,” says Spagnuolo.

Liu also should have disclosed to his clients the possible risks involved with not obtaining the clearance certificate and, in turn, being on the hook for any owing capital gains tax, adds Spagnuolo.

Going forward, both Stojicevic and Spagnuolo say changes to the federal process should happen to ensure the law is properly applied and enforced.

“I think you’re going to see different forms come out and I think you’re going to see different guidelines come out from these bodies [the Law Society of BC and the Society of Notaries Public BC] because they don’t want their members to be regularly sued by the federal government,” says Stojicevic.

For Spagnuolo, an ideal fix would be the creation of an online database.

“A solution would be for the federal government to have a registry of all the registered taxpayers and someone’s authorized representative could access that,” he says.

For potential homebuyers, the lawyers suggest you shouldn’t lose any sleep over the CRA potentially knocking on your door, as usually the matter is handled by your legal representative.

“If they’re concerned, have a conversation with their lawyer or notary to ensure that this doesn’t happen to them, but ultimately it’s up to us to ensure that our clients are protected,” says Spagnuolo.

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