Canada: Updates To Section 116 Clearance Certificate Process

(First published by the Canadian Tax Foundation in (2012) 12:1Tax for the Owner-Manager.)

The Canada Revenue Agency ("CRA") has released updated Information Circular IC72-17R6 dated September 29, 2011, replacing IC72-17R5 (March 15, 2005).  The revised circular reflects legislative changes to section 116 and the definition of "taxable Canadian property" that have been enacted over the past several years, and addresses issues relating to section 116 compliance for fiscally transparent entities.  In particular, the circular addresses the application of the hybrid entity clause in Article IV(6) of the Canada-U.S. Tax Convention ("Canada-U.S. Treaty") and compliance procedures for partnerships.  The circular also explains how the recently introduced "Declaration of Eligibility" forms NR301, NR302 and NR303 are integrated into the section 116 compliance process.  This article summarizes the changes contained in the revised circular.

Treaty-Exempt and Treaty-Protected Property

Numerous articles have discussed the amendments in section 116 that introduced the concepts of "treaty-protected property" and "treaty-exempt property."  To summarize, section 116 compliance and withholding obligations do not apply to "excluded property", the definition of which includes "treaty-exempt property".  To be "treaty-exempt property", the property must qualify as "treaty-protected property", and where the purchaser and vendor are related at the time of the disposition, the purchaser must give notice under subsection 116(5.02) to the CRA within 30 days after the date of the acquisition of the property. 

Where the purchaser and vendor are related, the property will not qualify as treaty-exempt property if the purchaser fails to file the subsection 116(5.02) notice, and regular purchaser's liability and vendor notification requirements apply.  The circular states that a Form T2062C notification filed after the 30-day deadline will not be accepted as valid.

Subsection 116(5.01) provides for an exclusion from the purchaser's liability provisions where, after reasonable inquiry, (a) the purchaser concludes that the vendor is resident in a country with which Canada has a tax treaty, (b) the property would be treaty-protected property if the vendor were resident in that country, and (c) the purchaser provides notice under subsection 116(5.02).

Accordingly, as a precautionary measure, an unrelated purchaser may prefer to file Form T2062C in order to reduce its risk, with respect to whether the vendor is resident in a treaty country, to the standard of "reasonable inquiry". 

Form T2062C contains an optional vendor certification section in Part D.  The general information section of that form states that generally the CRA will accept that the purchaser has made reasonable inquiry if Part D is completed by the vendor or if an equivalent declaration is obtained from the vendor. 

Treaty Exemptions

The circular has been revised to reflect that section 116 vendor notification and clearance certificate requirements are no longer required in respect of treaty-protected property (unless, as noted above, the purchaser and vendor are related and the purchaser fails to timely file a subsection 116(5.02) notice).  Where the vendor requests a clearance certificate and makes a claim under a tax treaty, the circular now indicates that the vendor should include forms NR301, NR302 and/or NR303, as applicable, or equivalent information, to establish its claim for the tax treaty benefit.


Where a partnership that has disposed of taxable Canadian property is claiming a treaty exemption based on its partners' entitlements to tax treaty benefits, the partnership should complete Form NR302, along with Worksheet B, or equivalent information.  The partnership should have on file forms NR301, NR302 and/or NR303, as applicable, or equivalent information, from each partner in respect of whom a treaty-based claim is to be made. 

Worksheet B, titled "Exempt Income Worksheet", lists the name of each partner, their type (such as an individual, corporation, trust, partnership or hybrid entity), their Canadian tax ID number, the country of residence (if applicable), their percentage allocation from the partnership and their treaty exemption percentage (applicable to partnerships and hybrid entities that may have a partial treaty-based exemption based on the entitlement of their members). 

Where there are stacked partnerships and/or hybrids, it appears that the information contained in the applicable NR forms must be kept on file in respect of all of the members in the chain of ownership whose treaty benefits are included in calculating the particular partnership or hybrid's treaty exemption percentage.

The circular also states that if a partnership has elected to be taxed as a corporation on its world income in a treaty country, the partnership can claim a treaty exemption on the basis of its own entitlement to treaty benefits or that of its partners, whichever is more beneficial.  In the former case, proof of the election is required.

Hybrid Entities

The circular clarifies earlier uncertainty regarding whether a hybrid entity can claim the treaty benefits granted to its owners under Article IV(6) of the Canada-U.S. Treaty.  It indicates that a hybrid can claim a full or partial treaty-based exemption based on the treaty exemptions of its members when filing for a clearance certificate.

Where a hybrid entity has disposed of taxable Canadian property and is claiming a treaty exemption based on the entitlement to treaty benefits of U.S. residents who derive income from the hybrid entity in accordance with paragraphs 6 and 7 of Article IV of the Canada-U.S. Treaty, the hybrid entity should complete Form NR303, along with Worksheet B.  The hybrid should also have on file Forms NR301 and/or NR303 for each person (other than a partnership) regarding their eligibility for treaty benefits.  If the hybrid entity lists any partnerships on its Worksheet B, the hybrid entity is required to have on file a statement from each such partnership of what information the partnership would have certified on its Form NR302 had all of its partners, other than those that reside in the U.S., resided in a country with which Canada does not have a tax treaty.

The circular also states that a hybrid entity that has elected to be taxed as a corporation on its world income (in its own country) would claim a treaty based exemption on its own entitlement to tax treaty benefits, and not that of its members/shareholders.  This differs from the choice afforded to partnerships to claim treaty benefits on their own behalf or on that of their members, as noted above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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