Kau v. R. – TCC: Failure to withhold 25% on purchase of real estate from a non-resident – taxpayer’s lawyer failed to make adequate inquiries – appeal dismissed

Kau v. R. – TCC:  Failure to withhold 25% on purchase of real estate from a non-resident – taxpayer’s lawyer failed to make adequate inquiries – appeal dismissed


Kau v. The Queen (July 31, 2018 – 2018 TCC 156, Russell J.).

Précis:   The taxpayer purchased a condominium in June 2011 from a vendor who turned out to be a non-resident of Canada.  There was no withholding pursuant to section 116 of the Act on the purchase and CRA assessed the purchaser 25% of the sale price.

Decision:   The Court found that the taxpayer had delegated to his lawyer, Mr. Zou, the responsibility to determine if the vendor, Mr. Yekta, was a non-resident.  The Court further found that Mr. Zou had not acted with due diligence and failed to withhold on the closing of the purchase from Mr. Yekta:

[16]  The Appellant himself did not make enquiry as to the residency of the vendor Mr. Yekta. However, he did, entirely reasonably, engage his solicitor Mr. Zou to at all times act in his best interests in efficiently bringing this real estate transaction to successful conclusion. This would include ensuring no liability attached to the Appellant per section 116 of the Act. Therefore the question is whether Mr. Zou on behalf of his principal the Appellant satisfied paragraph 116(5)(a) by having made “reasonable inquiry” resulting in “no reason to believe that [the Vendor] was not resident in Canada.”


[17]  In the run-up to the June 30, 2011 closing, Mr. Zou became fixed with knowledge that the Vendor’s address for service was an address in Danville, Calif., U.S. He became aware also that two years earlier in 2009 the Vendor had had that same address for service when purchasing the subject Toronto condominium. Also Mr. Zou knew that the Vendor did not reside the Toronto condo he was selling – rather, a tenant of the Vendor had lived there. Mr. Zou testified he was of the view that an address for service was not indicative of residency.


[18]  Did Mr. Zou make “reasonable inquiry”? The one thing he did in respect of the residency matter was on June 21, 2011 requisition from Ms. Chung, “satisfactory evidence of compliance with section 116”. This request yielded from Ms. Chung a draft unsworn “affidavit” and nine days later an actual unsworn “affidavit” signed by the Vendor who declared therein before a California notary public that, “I am not a non-resident of Canada within the meaning of Section 116 of the Income Tax Act (Canada)”. The real estate transaction proceeded to close without $92,000 or any of the purchase price being withheld on account of non-resident tax.

[22]  If the unsworn affidavit had at all responded to the specific red flags as to potential non-residency (unlikely as Mr. Zou seems not to have asked about such flags), and assuming such responses were corroborative of the Vendor being a resident of Canada, that almost certainly would have been sufficient to constitute for Mr. Zou a “reasonable inquiry”. It is obvious that “reasonable inquiry” entails consideration of not just what was asked, but also of response(s) received. Here, follow-up questions would have been appropriate. To say a brief and bald unsworn statement was sufficient to quell concerns raised or that should have been raised by the California-related red flags is not sufficient. Such statements as to residency can well be wrong, intentionally or not. In my view it is not reasonable that they should unconditionally be accepted where, as here, the option of further enquiry exists. Speaking completely generally, in terms of trustworthiness it must not be overlooked that what is said in these statements, including those unsworn, can mean an immediate lessening by 25% of a seller’s proceeds of sale.


[23]  Thus I conclude that what happened in this case did not constitute “reasonable inquiry”. I find this taking into account that what is “reasonable” could be any of a range of actions, or inaction, determined by the pertinent factual context. The factual context here was such that it was not reasonable to not pursue the matter beyond receipt of the unsworn affidavit. Simple questions such as what was the Vendor’s permanent address as opposed to “address for service” and provision of a copy of the Vendor’s driver’s license, would have done much to bring clarity to this situation without undue further efforts. (It is recognized that answers to these questions would often (but not always) lead to an accurate understanding as to residency, noting as well in this regard subsections 250(3) and (5) of the Act.) The statutory provision involved, subsection 116(5)(a), calls for and deserves more than a brief, baldly stated affidavit or solemn declaration when there are factual red-flags potentially suggestive of non-residency. The matter should then be pursued, to give due effect to the fiscal concern that Parliament sought to address in its drafting of subsection 116(5)(a).

As a result the appeal was dismissed with costs.