Withholding tax required for non-resident defendants

Author: Denise M. Hendrix

Posted: April 27, 2017

Please click this link for the full text of the recent decision of the B.C. Supreme Court in Mao v. Liu (2017 BCSC 226).

This case confirmed that a Purchaser of property from a Court Ordered sale has liability for withholding 25% of sales proceeds pending clearance from Revenue Canada where a Defendant is a non-Canadian resident.

The case concerned a court-ordered sale by a writ holder. A B.C. notary public, acting for the purchasers, enquired about the residency status of the Defendant and was told by Counsel for the writ holder that they could not provide any information because they acted for the Creditor, not the Defendant. The ITA requires that the purchaser make “reasonable enquiries” as to the residency of the Defendant and the Court considered that a Court Ordered sale was a sale where the title transferred from the Defendant to a Purchaser and therefore a holdback for non-residency applied. The notary public was held liable to his purchaser-clients for failing to advise them of the tax issue and failing to hold back the necessary 25% of the sale proceeds until they obtained a clearance certificate from Revenue Canada.

We note that this requirement does NOT apply to post-foreclosure sales. However, we anticipate that a lot of purchasers counsel may now be requesting or trying to determine the residency of defendants before closing an in foreclosure sale. In the absence of evidence as to the Canadian residency of the Defendants, we anticipate them taking the position that are required to withhold 25% of the purchase price against the potential tax liability until they pay or obtain the appropriate tax clearance.

This changes how we will view equity on in foreclosure Judicial listings as we must consider the 25% potential holdback and payment to Revenue Canada in calculations of equity and the ability to be paid out in full in Court Ordered Sales.

Now, this issue is extremely rare. It is not often that a Defendant is a non-resident when they have bought property in Canada and given a mortgage to a Lender. But this can happen and our goal is to manage your expectations in those circumstances and avoid the possibility of agreeing to a sale to a third party during the foreclosure proceedings and then only receiving 75% of the sale proceeds which may be insufficient to pay you out in full.

We must note that the status of the Defendants at the time of the sale is what is relevant to whether a hold back of the sale proceeds pending payment of outstanding taxes or receipt of a clearance certificate from Revenue Canada is required. As the borrower’s circumstances may have changed from the date of the mortgage advance to the date of a foreclosure sale we need to ensure we know what we are dealing with at the time of an in foreclosure sale.

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