Kau – Tax Court of Canada finds declaration of non-residency from a vendor to be insufficient to avoid s. 116(5) liability where there were indicators of a non-resident address

S. 116(5) indicates liability for failure to withhold under s. 116 on a purchase of taxable Canadian property from a vendor who in fact is non-resident unless “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada.” Russell J found that this standard was not met where the purchaser’s counsel was satisfied with a one sentence unsworn statement before a California notary public in Danville, Calif., U.S.A., in what was titled “affidavit”, containing the statement of the vendor (whose address for service was in California) that, “I am not a non-resident of Canada within the meaning of section 116 of the Income Tax Act (Canada) and nor will I be a non-resident of Canada at the time of closing.”

Russell J stated that, given the presence of “red flags:”

[W]hat happened in this case did not constitute “reasonable inquiry”. … Simple questions such as what was the Vendor’s permanent address as opposed to “address for service” and provision of a copy of the Vendor’s driver’s license, would have done much to bring clarity to this situation without undue further efforts. … [S]ubsection 116(5)(a), calls for and deserves more than a brief, baldly stated affidavit or solemn declaration when there are factual red-flags potentially suggestive of non-residency.

Neal Armstrong. Summary of Kau v. The Queen, 2018 TCC 156 under s. 116(5).