Humber/Ontario Real Estate Course 3 Exam Practice

A U.S. citizen seller has listed a cottage in Canada. The prospective buyer is worried about tax implications due to the seller's non-residency. What is the buyer's liability?

1. The buyer has no liability in that regard.

2. The buyer can sign a non-residency declaration on behalf of the seller.

3. The Income Tax Act imposes a tax liability on the buyer for taxes owed by a non-resident seller of Canadian real estate if the seller fails to pay such taxes.

4. No tax is payable by non-residents for capital gains realized on the sale of Canadian property.

5. All tax responsibilities fall on the seller regardless of residency.

6. There are no specific tax implications in this scenario.

The correct answer is: The Income Tax Act imposes a tax liability on the buyer for taxes owed by a non-resident seller of Canadian real estate if the seller fails to pay such taxes.

The correct choice highlights an important aspect of tax law regarding real estate transactions in Canada involving non-resident sellers. When a non-resident seller, such as a U.S. citizen in this case, sells Canadian real estate, the Income Tax Act requires the buyer to withhold a portion of the sale price to cover any potential capital gains tax that the seller may owe. This means that the buyer holds a liability in terms of ensuring that the appropriate taxes are handled. The rationale behind this rule lies in ensuring that the Canadian government can collect any taxes owed by the seller, especially because non-residents may not have a straightforward way to pay these taxes after the sale. Thus, if the seller does not pay the owed taxes, the buyer could be held responsible for remitting these taxes to the Canada Revenue Agency (CRA) based on the withholding requirement. This is a necessary precaution to protect governmental revenue and enforce tax compliance. In contrast, while some options indicate that the buyer has no liability or that all tax responsibilities fall on the seller, these do not reflect the legal obligations under the Income Tax Act. The buyer indeed has a responsibility in the transaction to ensure tax compliance related to the seller’s non-residency status.