Law Times

Law Times • apriL 30, 2018 Page 7 www.lawtimesnews.com Foreign investors in Ontario become non-resident vendors BY JEFFREY LEM M uch ado has been made about the increase in the number of foreign investors in Cana- dian real estate, especially in jurisdictions such as British Columbia and Ontario, both of which have passed legislation to tax this foreign "invasion" and to keep housing relatively affordable. Indeed, foreign buyer taxation has been perhaps the most topical issue in the resi- dential real estate world for more than a year now, and most practitioners have now adjusted (perhaps begrudgingly) to the new work f low and processes intro- duced in response to this foreign buying activity. But have these same practitioners con- sidered the "back end"? That is, if Cana- dian real estate has in fact been "bought up" by a wave of foreign buyers in the years leading up to now, won't these for- eign buyers eventually sell, either in the ordinary course or as part of an invest- ment repatriation? Of course, they will, eventually, and when that happens, real estate practitio- ners may have to deal with the (sizeable) income tax consequences of non-resident vendors. As most practitioners know, income tax is typically payable to the Canada Revenue Agency, formerly Revenue Can- ada, on the capital gain, if any, from the sale of Canadian real estate. This income tax is usually payable by the vendor and, where the vendor is resi- dent in Canada, then that in- come tax liability rests entirely with the vendor. The risk of non-payment, however, can also fall on the purchaser if the vendor of the real estate happens to be a non- resident. The much-dreaded s. 116 of the Income Tax Act requires the purchaser to withhold and remit typically 25 per cent of the entire pur- chase price for the property if the vendor is a non-resident. This is true whether or not, ultimately, the non- resident vendor owes any income tax at all on the sale. The operative question for all pur- chasers and their lawyers is, "How do we know if the vendor is or is not a resident of Canada?" Well, in this respect, s. 116 is deceptively simple. It says that the pur- chaser can avoid liability for the with- holding tax obligation if the purchaser has satisfied itself, after "reasonable inquiry," that the vendor is not a non- resident (the accepted tax nomenclature is a double negative!). Unfortunately, the CRA provides no specific guidance as to what "reasonable inquiry" actually means. The generally accepted standard of practice to date is to obtain an affida- vit (or a statutory declaration) from the vendor attesting as to residency. If a pur- chaser closes without such a residency affidavit, and the vendor turns out to be a non-resident (who does not ultimately pay the income tax on the capital gains), then the purchaser becomes liable for the unremitted withhold- ing tax and, by extension, the lawyer becomes liable in negligence to the purchaser for having closed without the affidavit (or without actually withholding and remitting the tax in the transaction). This tax liability is rarely trif ling — just ask the notaries for the purchaser in the British Columbia Su- preme Court decision of Mao v. Liu (2017 BCSC 226), who closed without the residency affidavit from the vendor and found themselves liable for the unremit- ted capital gains tax to the tune of almost $700,000 (yes, houses can be worth that much in Vancouver). While pundits routinely point to Mao v. Liu as a cautionary tale about the risks of closing without a residency affidavit from the vendor, the proposition is trite — of course, you must obtain a residency affidavit (or a s. 116 certificate issued by the CRA confirming that the withhold- ing tax has been pre-paid)! That is not at all the full story. Most practitioners would be abso- lutely shocked to find out that, even if you have a residency affidavit in the file, it is not dispositive of the vendor's resi- dency if the purchaser (and this includes the purchaser's lawyer) knows or ought to have known otherwise! In other words, if circumstances lead the purchasers or their lawyers to suspect that the vendor is non-resident, they might not be able to rely on the residency affidavit delivered from the vendor! CRA Information Circular IC72- 17R6 specifically provides that, notwith- standing such residency affidavit: . . . the purchase may become liable if, for any reason, the CRA believes the purchaser could have or should have known that the vendor was non-resident or did not take reasonable steps to find out the ven- dor's residence status. What red f lags could vitiate reliance on the residency affidavit and what "rea- sonable steps" are necessary to make out the due diligence defence are both unclear (and Mao v. Liu did not speak to this at all). It has been suggested that things such as foreign phone numbers, foreign driver's licences and offshore payment instructions all point to vendor non-residency, and if there are enough of these red f lags in the file, the residency affidavit won't be worth the paper on which it is printed! Yikes! Time will tell, as this alleged inventory of non-resident owned real estate works its way through the system. LT uJeffrey Lem is the director of titles for the province of Ontario and an elected bencher for the Law Society of Ontario. This article ref lects the personal views of the author alone. Costs awards in estate litigation need scrutiny BY JONATHAN M. FRIEDMAN E state litigation matters are becoming more and more expensive. Clients are required to foot the bill for medical expert reports and examinations of solicitors. They must pay for cross-examinations and the review of potentially thousands of pages of medical and legal records by their lawyers. Historically, costs in estate litigation were ordered to be paid out of the estate for all parties. This was jus- tified, in part, on the basis that it was the deceased's action — or failure to take appropriate action — that required the court to intervene. Clients would com- mence litigation with the benefit of knowing that their costs would likely be reimbursed by the estate regard- less of their success or failure. However, in recent years, there has been a cultural shift by the courts in estate litigation matters. This change has been toward a civil litigation model where the loser pays. This presents a problem for estate liti- gation lawyers who are presented with a dilemma of how to properly advise their clients when it comes to resolution. Should lawyers recommend resolution without costs if their clients have incurred significant expense? Are the large costs associated with proceeding to trial or summary judgment worth the risk of a potential costs award? Ultimately, the adoption of the "loser pays" model in estate litigation may act as a barrier to the parties' re- solving an issue, once litigation has been commenced and significant costs incurred. The discretionary uncertainty of costs awards in civil litigation is trite knowledge among civil litigation lawyers in Ontario. Rule 49 offers to settle and other tactics are regu- larly recommended by counsel with the hope that the discretion of the courts regarding any costs award or awards will sway in their clients' favour. The expansion of the civil model of costs awards into estate litigation may be the result of an increase in frivolous will challenges and estate litigation proceed- ings or simply a change in the views of the judiciary. Yet, those who practise estate litigation know that es- tate and civil litigation can be very different procedur- ally from one another and may recognize the possibil- ity that the shift toward the civil "loser pays" model is not always warranted and depends on the facts of each case. For example, in many civil litigation matters, the plaintiff will have the usual benefit of accessing and possessing the majority of their evidence to prove their case. However, in will challenge proceedings alleging lack of testamentary capacity, undue inf luence and/ or suspicious circumstances, where there are no lay witnesses available to give evidence, the applicant is arguably unable to know the strength of their case due to the fact that the evidence they will need to rely on at trial is hidden under the cloak of solicitor/client privilege and unattainable prior to the commence- ment of the litigation due also to doctor/patient con- fidentiality. As a result, applicants are required to obtain a court order to compel access to the evidence, which may very well have deterred them from commencing the application in the first place. These court orders (called orders giving direction) are often obtained on the consent of all parties at the initial return date of the application. Is it justifiable to hold a will challenger liable for the estate's costs in defending an application that the estate consented to progressing? Were they not required to commence the litigation to obtain access to the records to satisfy themselves regarding any lack of capacity on the part of the de- ceased or lack of undue inf luence? Is a will challenger not just acting in the best interests of the deceased and the beneficiaries by ensuring that there were no suspi- cious circumstances surrounding the preparation of the deceased's will? By shifting to the civil costs award model, the courts have attempted to instill reasonableness and deter individuals from initiating frivolous litiga- tion of estate-related disputes, like in Bilek v. Salter Estate. However, what is the cost of this attempt? A shift to the loser pays model may have the opposite desired ef- fect and prevent parties in the midst of litigation from resolving the dispute. Mediation may assist the parties to come to a reso- lution, but mediation may not always be an option in an emotionally charged estate litigation, especially if a party is refusing to negotiate a resolution based solely on costs. Consider the situation where an applicant — af- ter obtaining all the medical and legal records of the deceased relevant to the litigation — agrees with the respondent estate that the evidence demonstrates that their application has no merit. Of course, they were not in the position to do so be- fore obtaining and reviewing these records, to which the estate likely consented to the applicant obtaining. Should they be permitted by the opposing party or parties to walk away without costs or should the dis- pute continue to trial? Does your client really benefit from paying to pro- ceed to trial or summary judgment on the basis that they may be entitled to a discretionary costs award by being victorious, the quantum of which is uncertain and unknown? Or should counsel refuse to negotiate a without- costs resolution because the applicant will certainly (and admittedly) be unsuccessful at trial? These issues must be considered. The shift toward the civil "loser pays" model in es- tate litigation matters may simply be a reaction by the courts to the ever-increasing costs of estate litigation. However, the effect on resolution and mediation is un- avoidable. To put it simply, the costs may outweigh the benefits. LT uJonathan M. Friedman is a litigation lawyer primar- ily practising in estate litigation with Heft Law PC. u SPEAKER'S CORNER COMMENT The Dirt Je rey W. Lem Je rey W. Lem

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