This posting was authored by
Cheryl Teron, a Partner in the Vancouver Office of Miller Thomson LLP and
Stephen Rukavina, an Associate in the Vancouver Office of Miller Thomson LLP
A non-resident of Canada may have to pay Canadian income tax on taxable capital gains earned on dispositions of taxable Canadian property. A taxable capital gain is one-half of the capital gain on a capital property. A capital gain is the amount the proceeds of disposition of the capital property exceed its adjusted cost base and reasonable selling expenses.
A non-resident of Canada who sells taxable Canadian property may also be subject to special procedures imposed on dispositions of such property under section 116 of the Income Tax Act.
This article will discuss what constitutes taxable Canadian property, tax treaty relief from Canadian taxation of gains, and the special procedures imposed on dispositions of certain taxable Canadian property by non-residents.
Taxable Canadian Property
The following are the most common examples of “taxable Canadian property”. Note, taxable Canadian property also includes an option, interest or right in any of the below examples.
Real or immovable property situated in Canada is taxable Canadian property. For example, residential housing and commercial properties located in Canada are taxable Canadian property.
The assets of a business carried on in Canada are taxable Canadian property. For example, the equipment of a business carried on in Canada is taxable Canadian property.
Taxable Canadian property includes a share of a corporation (other than a mutual fund corporation) that is not listed on a designated stock exchange if, at any time during the last 60 months, more than 50% of the fair market value of the share was derived directly or indirectly from any combination of (1) real or immovable property situated in Canada; (2) certain Canadian resource properties; and (3) an option, interest or right in (1) or (2). This definition is geared toward catching shares of private corporations. Note, the shares of a resident or non-resident corporation can fall within this definition.
Taxable Canadian property also includes a share of a corporation that is listed on a designated stock exchange and a share of a mutual fund corporation if, at any time during the last 60 months, two conditions are satisfied. First, 25% or more of any class of shares of the corporation were owned by any combination of the taxpayer who owns the share and parties that do not deal at arm’s length with the taxpayer. Second, the more than 50% of fair market value test described in the paragraph directly above is satisfied. This definition can catch shares of public corporations listed on exchanges such as the Toronto Stock Exchange, TSX Venture Exchange, New York Stock Exchange, and London Stock Exchange.
Note, a share can also be deemed to be taxable Canadian property for 60 months in certain situations such as if the share was acquired on a tax deferred transaction involving the transfer of taxable Canadian property.
Interests in Partnerships and Trusts
Taxable Canadian property includes an interest in a partnership or an interest in a trust (other than a mutual fund trust or an income interest in a trust resident in Canada) if at any time during the last 60 months more than 50% of the fair market value of the interest was derived directly or indirectly from any combination of (1) real or immovable property situated in Canada; (2) certain Canadian resource properties; and (3) an option, interest or right in (1) or (2). A unit of a mutual fund trust will be taxable Canadian property if it satisfies the conditions, discussed above, for public company shares to be considered taxable Canadian property.
Note, a partnership interest can also be deemed to be taxable Canadian property for 60 months if the interest was acquired on a tax deferred transaction involving the transfer of taxable Canadian property.
Treaty Protected Property
A non-resident who disposes of taxable Canadian property will not necessarily have to pay tax on any taxable capital gains earned on the disposition. A non-resident’s taxable capital gains on treated-protected property are excluded from Canadian taxation. “Treaty-protected property” means property any income or gain from the disposition of which by the taxpayer would be exempt from tax under Part I of the Income Tax Act because of a tax treaty with another country.
Under the Canada – United States Income Tax Convention, assuming the limitation on benefits provision has been satisfied, a United States resident’s gain from the disposition of property is only taxable in the United States unless the property disposed of was one of the following:
- real property situated in Canada including any option or similar right in respect thereof and with the term real property including rights to explore for or to exploit mineral deposits, sources and other natural resources and rights to amounts computed by reference to the amount or value of production from such resources;
- a share of a corporation resident in Canada if the value of the corporation’s shares is more than 50% derived from real property situated in Canada;
- an interest in a partnership, trust or estate the value of which is more than 50% derived from real property situated in Canada; and
- personal property forming part of the business property of a permanent establishment which the United States resident has or had (within the 12 month period preceding the date of alienation) in Canada.
Special Procedures Imposed on Sales of Certain Taxable Canadian Property
Non-residents disposing of certain taxable Canadian property must notify the Canada Revenue Agency (“CRA”) about the disposition either before it happens or not later than 10 days after the disposition. Generally, a Form T2062: Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property is used. A non-resident’s failure to comply with the notice requirement may result in a penalty plus any applicable interest.
More importantly, the CRA will only issue a certificate of compliance after being notified and the non-resident paying an amount to cover the tax on any gain realized on the disposition or providing adequate security for such tax. If a certificate of compliance is not issued, the purchaser is liable to pay up to 25% (and in some cases 50%) of the purchase price as tax on behalf of the non-resident vendor. If a certificate of compliance has been issued prior to the disposition, the purchaser will still face liability should the certificate limit set out on the certificate be less than the amount paid by the purchaser. The purchaser is given the right to withhold from any amount paid or credited to the non-resident or otherwise recover from the non-resident any amount paid by the purchaser as such a tax. The rules set out in this paragraph apply regardless of whether the purchaser is a resident or non-resident of Canada.
If the disposition is between non-arm’s length parties and the consideration paid is less than fair market value, the proceeds received by the non-resident and the amount paid by the purchaser are generally deemed to be fair market value for the purposes of the above rules.
Property that falls within the definition of excluded property is exempt from the procedures mentioned above. The following are the most common examples of “excluded property”:
- a property (other than real or immovable property situated in Canada and certain Canadian resource properties) that is described in an inventory of a business carried on in Canada;
- a share of a corporation that is listed on a recognized stock exchange;
- a unit of a mutual fund trust;
- a bond, debenture, bill, note, mortgage, hypothecary claim or similar obligation;
- an option, interest or right in any of the above properties; and
- a property that is, at the time of its disposition, a treaty-exempt property.
A “treaty-exempt property” is a treaty-protected property as discussed above. However, where the purchaser and the non-resident vendor are related, the purchaser must provide a notice to the CRA in respect of the disposition in order for the property to qualify as treaty-exempt property. The notice must be given within 30 days after the date of the acquisition of the property. A Form T2062C: Notification of an Acquisition of Treaty-Protected Property from a Non-Resident Vendor may be used to give such notice.
The authors of this posting may be contacted as follows:
Cheryl Teron, Partner: (604) 643-1286 or firstname.lastname@example.org
Stephen Rukavina, Associate: (604) 643-1277 or email@example.com