A recent decision by the British Columbia Supreme Court has suddenly raised awareness of a provision in Canadian tax law that could pour cold water on hot markets where foreign speculation is a concern.
The case involved a B.C. notary public who failed to disclose a property was being sold by a foreign owner. The owner did not pay the required capital gains tax. That tax was extracted from the buyer who sued to recover the money. The court sided with the buyer who has been awarded $600,000.
The Canada Revenue Agency requires non-residents to pay a 25% tax on capital gains from the sale of Canadian property. The CRA considers people who do not live in the country six months out of 12, and who do not pay income taxes here to be foreign investors and speculators and therefore subject to the tax.
Here is the rub: the requirement to disclose residency comes on real estate documents, not tax documents, and is based on the honour system. Application of the capital gains tax is rare.
If the goal is to discourage foreign speculation from lighting a fire under the real estate market, closing the “honour system loop-hole” and ensuring foreign speculators pay the 25% capital gains tax could be much more effective in cooling hot markets than trying to invent and implement new taxes that would merely do the same thing.
Proper application and enforcement of existing laws would also go a long way to protecting buyers, and their agents, from legal jeopardy and a surprise visit from the taxman.