Purchase Agreement S. 3.1 (h) – Title Review and Non-Residency

s. 3.1 (h) - Title Review and Non-Residency

Continuing along, s. 3.1(h) reads:

(h) the seller will ensure the seller’s representations and warranties are true by:

(i) reviewing documents such as a Real Property Report (RPR), land title and registrations on title;

(ii) determining non-resident status for income tax purposes and determining any dower rights; and

(iii) doing other needed research;

As the wording makes it clear, this section applies to the Seller in the contract.

Clause (i) makes reviewing the RPR and title part of warranties and representations made by the Seller to Buyer. We will review the matter of the Real Property Report at length at a future post (specifically when we are reviewing s. 10.2). So for now suffice it to say that the Seller needs to ensure that he possesses an RPR that is current.

The title section of the clause requires the seller to be familiar with his title (it may sound silly but unfortunately there are many instances in which the sellers are not aware of certain registrations on their title). By the time the Seller has agreed to sell the property and has finalized the contract, it may be too late for the Seller to dispute any financial encumbrance on title (such as a builder’s lien). This clause foresees such a problem and makes it an obligation of the Seller to review and settle such an issue before a contract has been formed. As an example, if you are thinking about selling your house but you also know that the landscaper who you hired last year has put a lien against your house, you would need to settle that matter (either at the Court or directly with the landscaper) before you list your house. Because once you have a buyer, you are obligated to transfer a clear title to your buyer.

Clause (ii) deals with matters of Dower and non-residency. Dower is a very important discussion that we will address when we are reviewing clause 7.1. Re the residency matter, there appears to be confusion amongst most sellers. This residency under s. 3.1 is not equivalent to a residency as defined under immigration/citizenship laws but one defined under Income Tax Act of Canada. Canada Revenue Agency considers many different factors in order to make such determination. In government’s own words, they decide residency on a case by case basis and an individual’s whole situation and all relevant facts are considered. Here are the steps that they take:

Step 1: Determine if you have residential ties with Canada

Step 2: Determine your residency status and its tax implications

(Source: https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/determining-your-residency-status.html)

There are many cases where the individual is a Canadian Citizen or a Canadian Permanent Resident from a citizenship perspective but for tax purposes, the person is a non-resident. We highly recommend you to talk to an accountant, tax lawyer or the CRA support if in doubt. If it is determined that the Seller is a non-resident of Canada, then he would need to apply for a Certificate of Compliance regarding sale of the house (more info available on https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t2062.html). If such a certificate is obtained before the closing date, it’s great news as the transactions closes normally. Otherwise, the seller’s lawyer is obligated to hold back 25% of the sale price (NOT the net-sale proceeds) until such time as the certificate is obtained. Unfortunately for many sellers, this means that there are not sufficient funds to close the deal and the seller will be noted in breach of the contract.

Let’s look at an example. If the sale price of a house is $400,000 and assuming the seller to be a non-resident, a holdback of $100,000 will be applied by the seller’s lawyer (This is the minimum amount for the holdback. There are many lawyers who as a matter of caution, hold back a larger percentage). That means that from the sale, there is only $300,000 available to pay out any mortgages, pay the realtors’ commissions, pay the legal fees, etc. Any shortfall would need to be paid by the seller to his lawyer BEFORE the closing date and if the seller cannot come up with such a payment, the deal will not close.

Please keep in mind though that the 25% holdback is not “lost” as the seller will receive it back once he has obtained the Certificate of Compliance.

In summary, if you are thinking about selling real estate, please talk to your lawyer and seek advice about matters such as RPR, Title, Dower and Non-Residency BEFORE listing your property in order to avoid any future complications and expenses.


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