13.2.1 Canadian Taxation of Gains of Non-Residents
Canada does not impose tax on gains from the disposition of property by a non-resident other than the disposition of taxable Canadian property. Accordingly, as a first step of the analysis, one has to determine whether a non-resident disposed of property and, if so, whether such property was taxable Canadian property, as this term is defined in the Act.
13.2.1 [a] Taxation of Gains of Non-Residents
Generally, a non-resident is subject to tax on the gains only from the disposition of taxable Canadian property, other than (1) treaty protected, and (2) certain assessable distributions in respect of Canadian property mutual fund investments.
Taxation of Capital Gains
The act provides that the disposition of certain properties does not result in ca capital gain. Such properties include:
1 – Eligible capital property, which generally includes goodwill, customer lists, licenses of unlimited duration, and other intangible properties of a taxpayer;
2 – Certain resource properties, including Canadian resource property, foreign resource property, timber resource properties, and interest, as a beneficiary, under a qualifying environmental trust;
3 – Certain specified debt obligations and mark-to-mark properties;
4 – Certain participating interests in non-resident entities by Canadian residents;
5 – Certain insurance policies;
6 – Canadian cultural property.
13.2.1 [b] The Meaning of Disposition
The taxpayer may realize a gain only on the disposition of property.
A disposition is defined to include:
1 – A whole or partial redemption or cancellation of a share, bond, debenture, note, certificate, mortgage or similar property;
2 – A settlement or cancellation of debt or any other right to receive an amount by a debtor;
3 – A conversion of shares in the case of merger or amalgamation;
4 – Expiration of an option to acquire or dispose of property; and
5 – Certain transfers of property to and from a trust.
Transfers Deemed Not to be Dispositions
A disposition generally does not occur as a result of a transfer of property that does not result in a change in the beneficial ownership of the transferred property.
Tax Deferred Rollovers
The Act contemplates that in certain circumstances, a taxpayer, including a non-resident, may transfer property on a tax deferred, or rollover, basis. Although for tax purposes these transfers constitute a disposition of the transferred property, the taxpayer may elect to dispose of the particular property at the lesser of its cost or fair market value.
13.2.1 [c] Re-Characterization Rules
Under the Act, a portion of the proceeds of disposition of property may be re-characterized and be treated for Canadian tax purposes as interest, dividends, royalties or ordinary income.
13.2.1 [d] Taxable Canadian Property
Generally, when a non-resident disposes of taxable Canadian property, a taxable capital gain from the disposition of such property is subject to income tax in Canada under Part 1 of the Act. Conversely, when a non-resident disposes of a property that is not a taxable Canadian property, the gain from such disposition should not be subject to the income tax under Part 1 of the Act, unless such property was held and disposed of in the course of the taxpayer’s carrying on business in Canada.
A taxable Canadian property is defined to mean the following properties and interest therein:
1 – Real or immovable property situated in Canada;
2 – A Canadian resource property;
3 – A timber resource property; and
4 – A life insurance policy in Canada.
5 – Any property used or held by the taxpayer in carrying on business in Canada, including eligible capital property and inventory.
6 – Taxable Canadian property includes equity holdings and interest in various entities, including Canadian and non-resident corporations, partnership and trusts.
Interest and Options in Taxable Canadian Property
A taxable Canadian property includes an interest in or option in respect of certain taxable Canadian properties, whether or not a particular property exists.
According to the CRA’s administrative position, for the purposes of the definition of “taxable Canadian property” an interest in or an option on a share would include (1) a warrant or other right to acquire a share or shares; or (2) a note or other debt instrument that is convertible into a share or shares.
Substitute Properties
Certain substitute properties that can be traced to a particular taxable Canadian property held by a taxpayer are deemed to be taxable Canadian property under the Act.
13.2.1 [e] Withholding and Reporting
Dispositions of taxable Canadian property by a non-resident are subject to extensive withholding and reporting requirements, imposed both on the non-resident vendor of taxable Canadian property and a purchaser, either a Canadian resident or a non-resident, who acquires property from a non-resident person.
Withholding
When a purchaser, including a non-resident purchaser, has acquired from a non-resident any taxable Canadian property (other than depreciable property or excluded property), the purchaser is required to withhold and remit to the Receiver General 25 per cent of the amount, if any, by which the cost to the purchaser of the acquired property exceeds the limit provided by a section 113 certificate, if any, issued under subsection 116(2) in respect of the disposition of the property by the non-resident to the purchaser.
The withholding rate may increase to 50 per cent in respect of certain taxable Canadian properties, the disposition of which does not result in a capital gain.
Section 116 Certificate and Procedural Requirements
Generally, in order to obtain a section 116 certificate, a non-resident vendor should submit to the CRA a completed Form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, along with the required supporting documentation listed in the Form T2062. The request for a section 116 certificate should be submitted at least 30 days before the time of the proposed transaction.
Liability of the Purchaser
A purchaser should not be liable to withhold and remit the amount under section 116 in the following circumstances:
1 – After reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident of Canada;
2 – A certificate in respect of the effected disposition issued under subsection 116(4) has been issued to the purchaser by the Minister in respect of the acquired property; or
3 – The amount of a section 116 certificate issued to the purchaser under subsection 116(2) is not less than the cost to the purchaser of the acquired property.
Excluded Property
A non-resident purchaser is not required to withhold under subsections 116(5) or (5.3) in respect of the disposition of a taxable Canadian property that is an excluded property.
Post-disposition Notification and Reporting
A non-resident vendor is obliged to notify the CRA of the actual disposition of taxable Canadian property where (1) the non-resident did not notify the CRA of the proposed disposition in the manner described in subsection 116(1); or (2) the transaction was completed in a manner different from the proposed disposition. The vendor should send the notification, by registered mail, not later than ten days after the date of the disposition of the particular property.
13.2.1 [f] Emigration from and Immigration to Canada
Emigration from Canada
As a general rule, subject to narrow exceptions, an emigration from Canada results in a disposition at fair market value of all properties owned at that time by an emigrating taxpayer, including individuals, trusts, and corporations.
As a result of the deemed disposition on the emigration, a taxpayer may realize gains on dispositions of her property, including capital and listed personal property, and , consequently, be liable to income tax as a Canadian resident in respect of these gains.
Immigration to Canada
Generally, a taxpayer is deemed to have disposed of the taxpayer’s assets immediately before becoming resident in Canada and then to re-acquire all such assets immediately after that time at fair market value. As a result, the cost of all properties to a new Canadian resident is set at the fair market value of such properties at the time a taxpayer became resident in Canada. Consequently, the taxpayer is only liable to Canadian tax on the appreciation in the value of property that occurred while the taxpayer was resident in Canada.
13.2.1 [g] Special Case – Payment by a Mutual Fund Trust
Part XIII.2 of the Act deals with non-resident investors in Canadian mutual funds. Generally, Part XIII.2 applies to the situations where a person pays to a non-resident investor who holds a Canadian property mutual fund investment an amount of assessable distribution, but only when such distribution is not otherwise subject to income tax under Parts I or XIII.
A non-resident taxpayer is liable to a 15 percent tax on the amount of any gain. The payer should withhold and remit to the minister the tax in respect of the assessable distribution paid to a non-resident investor. Generally, a non-resident investor who received an assessable distribution from a Canadian mutual fund is not required to file a tax return in respect of the deemed disposition of taxable Canadian property.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
