In the 2010 Federal Budget, the Department of Finance announced
a significant, and very welcome, amendment to the Income Tax
Act (Canada) (the "Tax Act"), which should greatly
facilitate non-resident investment into Canada. In general,
this amendment will eliminate the need to obtain clearance
certificates under section 116 of the Tax Act on the disposition of
shares of most Canadian corporations.
Under the current provisions of the Tax Act, all shares of
Canadian private corporations, and shares of Canadian public
corporations where the holder and non-arm's length persons own
25% or more of a class of shares, are considered to be
"taxable Canadian property". As a result, on the
disposition of such shares the vendor must comply with the
notification requirements of section 116 of the Tax Act, and will
be liable for Canadian tax on any capital gain, unless such capital
gain is exempted by virtue of an applicable income tax convention.
In addition, in certain situations, a Canadian tax return must be
filed in respect of the disposition.
These requirements posed significant administrative obstacles
and costs for non-resident investors, particularly private equity
funds. Private equity funds, often formed as partnerships with
numerous partners, were required to provide information respecting
each partner in order to obtain the necessary section 116
certificate and, in certain cases, those partners were also
required to file Canadian tax returns.
Under the proposed amendments, the definition of "taxable
Canadian property" is narrowed to include shares of
corporations only where those shares derived 50% or more of their
value from real estate or resource property situated in Canada at
any time in the 5-year period preceding the disposition. As a
result, shares of many Canadian corporations which were previously
taxable Canadian property will now be exempted from the Canadian
tax system. More specifically, a disposition of shares which are
not taxable Canadian property under the amended definition will not
give rise to section 116 notification requirements, a Canadian tax
liability or Canadian filing obligations. (In certain circumstances
where a share was acquired on a tax-deferred basis or pursuant to a
merger where the initial investment was taxable Canadian property,
the share may be deemed to be taxable Canadian property regardless
of the corporation's asset base.)
The announced amendment is a fundamental change to the rules of
Canadian taxation and will significantly enhance the ability of
non-residents to invest into Canada. The measure will apply in
determining, after March 4, 2010, whether property is taxable
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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