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Ensure you’re in the clear: Tax court decision serves as warning to home buyers

By TIM CESTNICK for The Globe and Mail

Perhaps you’ve heard the story of the man who was in the hospital in a coma for several weeks. His wife was by his side the entire time. After waking up, his eyes filled with tears and he said to his wife: “Dear, you’ve been with me through so many bad times. When I broke my leg, you were by my side. When I lost my job last year, you were there. When our life savings disappeared, you stood by me. And as my health has failed, you’ve been here with me. You know what?” he said. “What is it honey?” his wife asked. “I think you’re bad luck,” he replied.

Bad luck can come in many forms, including nonsensical tax reassessments from Canada Revenue Agency. On July 31, a decision by the Tax Court of Canada upheld just such a reassessment. The judge’s decision makes little sense if you ask me, but it serves as a warning for the rest of us.

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Why does this matter? Well, Section 116 of our tax law will require a purchaser of Canadian real estate to withhold 25 per cent of the purchase price and send it to the taxman if buying the property from a non-resident person. This is meant to ensure that non-residents who own and then sell Canadian real estate pay their share of taxes on any capital gains.

Section 116 requires the buyer to make a “reasonable inquiry” and have “no reason to believe that the seller is a non-resident of Canada.” Without this reasonable inquiry and belief about the seller, the buyer is supposed to withhold 25 per cent of the purchase price and send it to the taxman.

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