2017-0703351E5 Paragraph 116(5)(a) - reasonable inquiry

Principal Issues: In the context of a real estate transaction, will the reasonable inquiry standard in paragraph 116(5)(a) be satisfied if the purchaser obtains a statutory declaration from the vendor that the vendor is not and will not at the time of closing be a non-resident of Canada?

Position: Yes, provided there are no facts and circumstances present that would suggest that the vendor might be or become a non-resident person.

Reasons: Request to sign the declaration would in such circumstances represent a reasonable inquiry.

Author: Eroff, Ina
Section: 116(5)

XXXXXXXXXX                                                                                           2017-070335
                                                                                                                   Ina Eroff, B.C.L./LL.B.
August 25, 2017

Dear XXXXXXXXXX:

Re: Meaning of reasonable inquiry

This is in reply to your email of May 9, 2017 where you requested our comments on the interpretation of “reasonable inquiry” in paragraph 116(5)(a) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”). Specifically, you are asking whether in the context of an arm’s length real estate transaction the reasonable inquiry requirement in paragraph 116(5)(a) of the Act will be satisfied if the purchaser obtains a statutory declaration from the vendor that the vendor is not and will not at the time of closing be a non-resident of Canada for purposes of the Act and the purchaser has no reason to believe that the declaration is false.

Our comments:

This technical interpretation provides general comments about the provisions of the Act.  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Subsection 116(5) of the Act imposes an obligation to withhold tax on a purchaser who acquires certain “taxable Canadian property” from a vendor who is a non-resident person. However, the purchaser incurs no such obligation to withhold tax under subsection 116(5) of the Act if, after reasonable inquiry, the purchaser had no reason to believe that the vendor was not resident in Canada. As stated in paragraph 58 of Information Circular 72-17R6, Procedures concerning the disposition of taxable Canadian property by non-residents of Canada—Section 116, the purchaser must take prudent measures to confirm the vendor’s residence status. Each case will be reviewed on an individual basis.

In our view, if a purchaser of real estate obtains a statutory declaration from an arm’s length vendor that the vendor is not and will not at the time of closing be a non-resident of Canada for purposes of the Act, and the purchaser has no reason to believe that the declaration is false, obtaining such declaration would generally qualify as a reasonable inquiry. Obtaining such declaration would not, however, provide a due diligence defence if there are facts and circumstances present suggesting that the purchaser should have made further inquiries. Such facts could include, for example, a known mailing address outside of Canada or any other indication of the vendor’s residence being outside Canada in the transaction documentation.

We hope this information is of assistance to you.

Yours truly,

Bob Naufal
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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