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INTERNATIONAL - Canadian notary must reimburse buyer stuck with non-resident seller's CGT bill

In Mao v Liu (2017 BCSC 226), the British Columbia Supreme Court has ordered a notary public to pay heavy compensation to the buyers of a Vancouver property, on the basis that the notary failed to determine that the vendor was not Canadian tax-resident.

Non-resident sellers of Canadian residential property must pay a special 25 percent capital gains tax on their profits from the sale. This is normally collected by imposing a withholding tax on the purchaser, who then forwards the amount collected to the Canada Revenue Agency (CRA). In order to do this, the purchaser must establish the tax residency of the vendor before the transaction is completed. This falls within the remit of the notary public's duties.

In this case, the purchasers Jun Mao and Jing Li agreed in November 2014 to buy the property for CAD5.56 million. They engaged a notary public called Tony Liu to handle the legal formalities.

The seller's agent was CE International Resource Holdings LLC (CEIR), of which Liu made the usual enquiries, including the question about tax residence. However, the law firm acting for CEIR refused to sign the declaration of tax residence. Borden Ladner Gervais, the law firm acting for CEIR, said the sale was court-ordered and its client was neither the vendor nor the owner of the property. CEIR was not, therefore, in a position to make any representations with respect to the property or any issues relating to it.

Despite this, the transaction went ahead. It subsequently emerged that one of the property's registered owners was indeed a non-resident for tax purposes.

Some time later, the purchasers received a letter from the CRA, noting that it had not received a statutory declaration of the sellers' tax residence (in accordance with s116 of Canada's Income Tax Act 1985), and that they (the purchasers) were obliged to pay withholding tax assessed at CAD695,000.

The purchasers brought a claim against Tony Liu to recover this amount. In his defence, Liu claimed that there was an 'indication' the registered owners were Canadian tax-resident, along with various other claims, of which the facts were disputed by the claimants and others.

The court rejected Liu's defence, citing s116(5) of the Income Tax Act. Mr Justice Affleck stated: 'If the defendants agreed to make the reasonable inquiry referred to in the above subsection, but failed to do so, and failed to advise the plaintiffs of their potential tax liability, and the plaintiffs have been assessed taxes because at least one of the registered owners of the property was not a resident of Canada at the time title to the property was conveyed to the plaintiffs, the defendants will have breached the contract with the plaintiffs defined by the engagement letter and will be liable for the consequent loss and damage incurred.' Mr Justice Affleck duly found Liu to be liable to the purchasers Jun Mao and Jing Li, with damages to be assessed.

As well as capital gains tax on foreign sellers of real estate, the BC government has introduced extra taxes on foreign buyers of Vancouver property. The 15 percent tax applies to purchases made from 2 August 2016.