Tax on Dispositions by Non-Residents

 

 

Tax on capital gains is payable on disposition of property situated in Canada. There are special statutory requirements imposed on a seller who is a non-resident prior to disposition because it will generally be more cumbersome for the Canada Revenue Agency (the “CRA”) to go after a non-resident for non-payment of tax than in the case of a resident. Such requirements can be found in section 116 of the Income Tax Act (Canada).

 

If one has been involved in a real estate with a non-resident, one may perhaps be aware that the non-resident seller needs to send a notice in prescribed form to the CRA in order to obtain a certificate. All these have to be done before closing of the transaction. The certificate sets out an amount which has to be withheld from the sale proceeds for remittance to the CRA, or in a case where the non-resident has paid 25% of the capital gains arising from the transaction or furnished to the CRA acceptable security in respect of the transaction, states that nil amount needs to be withheld or remitted in respect of the transaction. If the certificate is not obtained prior to closing, the purchaser is entitled to withhold 25% of the purchase price for remittance purposes.

 

Lawyers retained for handling such real estate transactions will take care of the matters described in the foregoing paragraph in order to protect their clients’ interest and in the case of the buyer’s lawyer, to ensure that he or she will not be liable for the tax on the capital gains. In most cases, an accountant has to be retained by the seller’s lawyer to prepare the notice for obtaining the certificate from the CRA.

 

The imposition of such tax on non-residents is, nonetheless, not restricted to real estate transactions. In fact, disposition of almost all kinds of capital property by non-residents will trigger the application of the aforesaid statutory requirements, with the notable exceptions of most publicly traded security like shares and mutual fund units, among other things.

 

Most people may not be aware that distribution of capital interest by a trust to a non-resident will also trigger the application of section 116 as it is regarded by the CRA as a disposition of property. As such, the aforesaid notice and certificate will have to be sent and obtained, failing which the trust will be liable for the tax not withheld and remitted.

 

It is now more common than ever before for a family to have its members scattered all over the globe. As such, a testator may in his or her will leave part of his or her estate to a descendent or relative in another jurisdiction. In another case, an individual may set up a trust for the benefit of his or her spouse and children and one or more of the children may immigrate to another country for more gainful employment or business opportunities. In all these cases, the distribution of the inheritance or the capital interest in the trust to the overseas beneficiary will cause section 116 to apply.

 

Our firm is experienced in preparing wills and trust deeds that involve non-resident beneficiaries. We are therefore able to advise on how to the tax liability arising from the application of section 116. In some cases, no tax is exigible on such distribution because the capital gain is nil. However, as each case is unique and there is no general rule in this respect, it is paramount that anyone who is concerned with this issue must seek professional legal and tax advice in order to avoid being hit with a CRA statement of account demanding substantial amount of tax.

 

 

 

 

Prepared by Iris Chung

Barrister & Solicitor

Metcalfe, Blainey & Burns, LLP

 

Published in August 2006