As much as I’d love to show you my blog video on Berczy Park in the St. Lawrence Market neighbourhood today, perhaps I’ll have to push that back to Friday.

This story hit the proverbial wire last night, and everybody in my industry is talking about it.

Plus, my accountant, and my lawyer, and all my friends who work in finance.

The shock-value of this story is real, but could this “ruling” actually last through an appeal, and change the way real estate is sold?

I’ve seen the story in a few places now, but I first read about it in the Calgary Herald, in an article entitled, “House Buyer Beware: Landmark B.C. Court Ruling Will Shake Real Estate Industry.”

The story, in a nutshell:

1) The C.R.A. was owed money by the seller of a property, who was not a legal resident of Canada.
2) The C.R.A. came after the buyer of the property, after the seller had absconded (probably back overseas).
3) The buyer of the property sued the notary for not determining the seller was a non-resident, and/or not holding back sale proceeds to account for capital gains tax owing.

Here’s the juicy part of the story, as it appears in the Calgary Herald:

Douglas Todd – Vancouver Sun – 3.27.2017

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.

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.”

Wow.

Game-changer, indeed.

But is this really going to hold up on appeal?

I know, I know – you’re going to tell me to shut up.  Stop being cynical for just two minutes, and think about the “benefits” of this ruling.

But this is just so far out to lunch, that I don’t think anybody can celebrate yet.  I think we have years of appeals ahead of us, as is often the case with any “landmark” ruling.

Check out the entire ruling if you have time, and/or are a nerd like me.  You can find it HERE.

What I find really interesting is the summary of claims from the defendant, and then the response from the defendant.

Below are two excerpts from the lengthy B.C. Court judgment:

The plaintiffs allege:

a)    they entered into a contract on November 3, 2014 to purchase real property in Vancouver for the sum of $5,560,000;

b)    CEIR was a creditor of the registered owners of the property and had conduct of sale pursuant to an order of this Court (the “Court Order”);

c)     pursuant to an “engagement letter” dated November 10, 2014 and on the letterhead of the defendants, the plaintiffs retained the defendants to complete the conveyance of the title to the property to them;

d)    the engagement letter included provisions that the defendants would “negotiate appropriate closing undertakings with solicitor/notary for the Seller” and would “make inquiries as to the residency status of the Seller pursuant to the Income Tax Acts [sic] as required”;

I observe that all parties understood it was the residency of the registered owners of the property that was relevant.

e)    the defendants sent a draft statutory declaration concerning the residency status of the registered owners of the property to the lawyers for CEIR which was BLG, who “refused to sign the statutory declaration as to the residency of the Registered Owners, saying that this was a court ordered sale and their client was neither the vendor nor the owner of the property, and therefore not in a position to make any representations with respect to the property or any issues relating to it”;

f)      one of the registered owners was not a resident of Canada at the time of the purchase of the property;

g)    “Contrary to the terms of the Engagement Letter, the Defendant Tony Liu Notary Corporation proceeded with the conveyance of the Property despite not having any indication as to whether the Registered Owners were residents or non-residents of Canada for tax purposes under the Income Tax Act”; and

h)    by letter dated February 23, 2015, the Canada Revenue Agency (CRA) advised the plaintiffs that no certificate of compliance with s. 116 of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) had been obtained in relation to the purchase of the property and accordingly the plaintiffs were obliged to pay withholding tax which was assessed at $695,000.

—-

In their response to civil claim the defendants made admissions the effect of which is that the following facts are not in issue:

a)              the plaintiff’s entered into the contract of purchase for the property as alleged;

b)              CEIR had conduct of the sale pursuant to the court order;

c)               the identity of the registered owners of the property, one of whom was not a resident of Canada at the time of the purchase of the property;

d)              pursuant to the engagement letter the plaintiffs retained the defendant notary corporation to convey title to the property to them;

e)              the engagement letter included a term that the defendant notary corporation was “to make inquiries as to the residency status of the Seller pursuant to the Income Tax Acts [sic] as required”; and

f)                title to the property vested in the plaintiffs on November 17, 2014.

The defendants also allege that they conducted a title search on November 10, 2014 of the property which showed:

a)              the mailing address of the registered owners was the address of the property;

b)              the registered owners had owned the property for more than 12 years; and

c)               “there was a history of mortgages [against the property] in favour of financial institutions in Canada”.

These are the alleged “indication” that the registered owners were residents of Canada at the relevant time.

So the defendants did attempt to ascertain whether or not the registered owners were residents, as per the last section (a, b, and c).

The mailing address of the owners was, in fact, the address of the property.

The registered owners had owned the property for more than 12 years.

And financial institutions had loaned on this property.

But was that enough?

Did they go far enough?

As the courts have ruled, they did not!

And frankly I’m shocked by this ruling, which I think is so exceptionally punitive, that I just can’t imagine it’s not overturned on appeal.

I get it.  I understand.

People are fed up with foreign buyers in Canada, whether it’s Toronto or Vancouver.

And just about every government, at every level, in every country, needs money.

Combine the two, and we get new taxes, like the 15% foreign buyer’s tax in Vancouver.

But now we’re also going to have the C.R.A. go after the buyer of a property, when they can’t go after the seller, who owes them money.

And this court case shows that the buyer can sue their notary, real estate agent, or lawyer, and that the courts may in fact side with the buyer.

But what are the further implications of the C.R.A.’s stance that they can come after the buyer when they can’t track down the seller?

How could this apply to, say, HST?

When houses are built here in Toronto, most builders do what is referred to as a “substantial renovation,” to save on the HST.

But ultimately it’s up to the C.R.A. to determine what is a “new build” and what is a “substantial renovation,” and the former comes with HST implications.

Section 7 of the standard OREA “Agreement of Purchase & Sale” contains the following section:

That can read “included in” or “in addition to.”

So if you’ve purchased a home, and the APS says “included in,” then that means even if the C.R.A. determines that HST should apply (after the fact), then it’s included in the sale amount, and thus the buyer doesn’t have to pay in addition.

If the C.R.A. determines that HST should apply, for a house that sold for $1,300,000, then they would suggest that house actually sold for $1,150,442, and there was 13% HST, for a total of $1,300,000.

Then the C.R.A. comes after the developer for that $149,558.

But by the same logic with respect to the capital gains tax for foreign buyers, if the C.R.A. wasn’t able to get that $149,558 from the developer/seller, would they then come after the buyer?

Who knows.

The Canadian government is spending money like it’s going out of style.  Apparently they spent $14,000 on one television, so anything is possible.

Bottom line for buyers and their agents: a new standard clause is coming.

Something like:

“The Seller hereby states that he or she is a legal resident of Canada with respect to Section 116(5) of the Income Tax Act, and that no capital gains will be owing upon completion of this sale.”

Something like that.  I’m not a lawyer, but I think a TEAM of them will be putting their heads together to come up with some verbiage to protect buyers, and as an extension, agents, lawyers, and notaries.

Something tells me this is not the last we’ve heard of this story…