Humber/Ontario Real Estate Course 4 Exam Practice

What tax liability does a buyer face when purchasing property from a non-resident seller?

1. No tax is payable by the buyer

2. Buyer can deduct taxes from the purchase price

3. Buyer assumes tax liability if the seller fails to pay

4. Seller is responsible for all tax payments

5. No tax is applicable on Canadian property sales

6. Taxes are split between buyer and seller

The correct answer is: Buyer assumes tax liability if the seller fails to pay

When purchasing property from a non-resident seller, the buyer faces the potential for tax liability primarily due to the application of the Income Tax Act in Canada. Specifically, non-residents selling Canadian real estate may have capital gains tax obligations that they have not fulfilled. In this scenario, the law mandates that a buyer may need to withhold a certain percentage of the purchase price, which acts as a precautionary measure to cover any potential tax debts that the non-resident seller may owe. If the seller has not paid their taxes, the buyer becomes liable for those tax obligations, meaning that the buyer must ensure these taxes are settled before completing the sale. This reflects a protective mechanism built into the real estate transaction process to ensure tax compliance and reduce the risk of unpaid tax liabilities from the seller being passed onto the government without proper collection measures in place. Thus, the buyer assumes a level of responsibility regarding the seller's tax status when dealing with a non-resident seller.