Buying real estate, whether residential or commercial, in Quebec is a complex process that requires meticulous preparation and a thorough understanding of legal and tax obligations. These precautions are particularly critical when the seller is a non-resident of Canada, as specific rules apply to protect the buyer from unforeseen tax liabilities. Here’s what every buyer needs to know to avoid pitfalls and secure their investment.

Verification of the Seller’s Residency Status

Before finalizing a transaction, it is essential to determine whether the seller is a resident or non-resident of Canada. This distinction is crucial as it directly impacts the buyer’s tax obligations. Under section 116 of the Income Tax Act (ITA), if the seller is a non-resident, the buyer may be held liable for the capital gains tax arising from the sale of the property. This liability can result in significant costs if not properly managed.

Practical Tip: Request a residency status declaration from the seller before signing the purchase agreement and verify this information with your legal advisor.

Tax Withholding Obligation for Non-Residents

When purchasing taxable Canadian real estate from a non-resident, the buyer is generally required to withhold 25% of the purchase price and remit it to the Canada Revenue Agency (CRA). This withholding ensures that the capital gains tax owed by the non-resident seller is paid. If the buyer fails to withhold this amount, they may be personally liable for the amount owed, plus any applicable interest and penalties.

Practical Tip: Work with your notary or lawyer to establish a withholding mechanism to ensure compliance with this obligation and avoid significant financial repercussions.

Certificate of Compliance to Avoid Tax Withholding

To avoid the 25% withholding, the non-resident seller can request a certificate of compliance from the CRA. This certificate confirms that the seller has met their tax obligations related to the sale and can reduce or eliminate the withholding requirement. To obtain this certificate, the seller must submit forms T2062 (federal) and TP-1097 (Quebec) and pay the estimated capital gains tax before the transaction closes.

Practical Tip: Require the seller to obtain this certificate before closing to avoid delays and legal complications.

Seller’s Declarations and Title Verification

The seller must provide the buyer with all relevant information about the property, including the existence of rights of first refusal, easements, mortgages, or any other ownership restrictions. This information is typically included in the purchase agreement and must be carefully verified to avoid future disputes.

Practical Tip: Hire a lawyer specializing in real estate law to conduct thorough due diligence on the titles and related documents before finalizing the purchase.

Spousal Consent for Family Residences

If the property being sold is the seller’s family residence, spousal consent may be required for the sale, even if the spouse is not a co-owner. This requirement stems from provisions in the Civil Code of Quebec, which aim to protect the spouse’s rights to the family residence and prevent disputes after the sale.

Practical Tip: Verify the seller’s marital status and, if necessary, request a written waiver from the spouse to avoid future challenges.

Restrictions on Purchases by Non-Canadians

Note that the Prohibition on the Purchase of Residential Property by Non-Canadians Act prohibits non-Canadians from purchasing residential properties in certain Canadian metropolitan areas until January 1, 2027. This restriction aims to stabilize the real estate market and promote homeownership for Canadian residents.

Practical Tip: If you are a non-Canadian or purchasing from a non-Canadian, ensure you understand these restrictions to avoid penalties and legal complications.

Conclusion: Secure Your Real Estate Transaction in Quebec

Purchasing real estate in Quebec, especially from a non-resident seller, requires heightened diligence and a thorough understanding of legal and tax obligations. By working with a lawyer specializing in real estate law, you can secure your investment, avoid unforeseen tax liabilities, and protect your long-term interests. For any questions or to obtain tailored legal advice for your situation, contact us at 514 993 6920 for a confidential consultation.