On February 26, 2008, the Federal government tabled its
Budget, in which it proposes a variety of tax changes,
including measures to improve the efficiency of the compliance
system for non-residents disposing of taxable Canadian
Under the existing provisions of the Income Tax Act (Canada)
(the "Act"), where a non-resident vendor disposes of
taxable Canadian property ("TCP"), other than
"excluded property", section 116 of the Act requires
the non-resident vendor to notify the Canada Revenue Agency
("CRA") of the disposition. Unless the vendor obtains
a tax clearance certificate, the purchaser may become liable
for the Canadian tax owing on the non-resident’s
gain. Accordingly, a purchaser will generally protect itself by
withholding and remitting a portion of the purchase price in
respect of the non-resident vendor’s potential
Canadian income tax liability.
In recent years, the section 116 compliance regime has been
criticized as cumbersome and inefficient because it fails to
take into account gains that are exempt from tax in Canada
through the application of a bilateral tax treaty. Further,
serious administrative backlogs in the length of time required
by the CRA to review a transaction have had a negative impact
on foreign investment in Canada. Non-resident vendors have
faced long waiting periods, abundant paperwork and delays in
receiving funds to which they are entitled.
The 2008 Budget seeks to streamline and simplify the
compliance process, commencing with dispositions taking place
after 2008. First, the Budget recognizes the impact of tax
treaties by expanding the definition of "excluded
property" to include "treaty-exempt property",
the disposition of which is excused from the section 116
compliance process. A property will generally be considered
"treaty-exempt property" if, at the time of
disposition, the income or gain from the disposition of such
property was exempt from tax in Canada by reason of the
application of a tax treaty. Where the vendor and purchaser are
related parties, the purchaser must notify the CRA of the sale
within 30 days of the disposition.
The 2008 Budget also relieves purchasers of their liability
to withhold and remit a portion of the purchase price where the
purchaser concludes, after a "reasonable inquiry",
that: i) the vendor is resident in a country with which Canada
has a tax treaty; ii) the TCP would be "treaty-protected
property" (as defined in section 248 of the Act) if the
vendor were resident in that particular country; and iii)
within 30 days of the acquisition, the purchaser notifies the
CRA of the disposition in the prescribed form.
Finally, a related change exempts non-residents from the
obligation to file Canadian income tax returns in respect of
dispositions of TCP where: i) no tax is payable by the
non-resident under Part 1 of the Act for the taxation year; ii)
the non-resident is not liable to pay any amount under the Act
in respect of a prior taxation year; and iii) each TCP disposed
of by the non-resident in the year is either "excluded
property" or a property in respect of which a clearance
certificate has already been issued.
These measures are meant to alleviate the impediment to
cross-border purchase and sale transactions created by the
section 116 certification process, and to encourage foreign
investment in Canada. However, as the proposals burden the
purchaser with conducting a "reasonable inquiry" into
whether the vendor is resident in a country with which Canada
has a tax treaty, and whether the TCP would be
"treaty-protected property", purchasers, particularly
in arm’s length transactions, may nevertheless choose
to err on the side of caution and continue to withhold tax and
require a compliance certificate from the non-resident, given
the dire consequences to the purchaser if he or she is mistaken
in this inquiry.
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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