Great news for non-resident investors, including, in particular,
non-resident investors in private equity funds. The Canadian
Federal Government has proposed a substantial change in its most
recent budget (dated March 4, 2010) to the definition of
"taxable Canadian property" (TCP) to exclude the shares
of a corporation, interests in a partnership and interests in a
trust that do not derive and have not derived at any particular
time in the 60-month period that ends at the time of measurement
(i.e., the time of disposition), directly or indirectly, their
value principally from one or more of (i) real or immovable
property situated in Canada, (ii) Canadian resource property, or
(iii) timber resource property. As a consequence, this measure
should eliminate section 116 compliance obligations (subject to a
prospective purchaser's satisfaction that the subject property
is not TCP), reduce the need for tax reporting and exempt a host of
non-resident persons who would otherwise be taxable in Canada on
the disposition of shares of Canadian corporations and other
interests who do not currently qualify for exemptive relief under
an existing Canadian income tax treaty or convention ("tax
treaty").
TCP is currently defined to include shares of a corporation
resident in Canada that are not listed on a designated stock
exchange, significant interests in listed shares of a corporation
resident in Canada, and other interests the value of which are, or
were within the 60-month period ending at the relevant time,
derived principally from real or immovable property (including
Canadian resource property and timber resource property). Gains
from dispositions of "taxable Canadian property", other
than of taxable Canadian property that is real or immovable
property or shares that derive their value principally from real or
immovable property, are generally exempt from taxation in Canada
under many tax treaties.
Generally, subject to relief under an applicable tax treaty, a
non-resident of Canada is: (i) subject to tax in Canada on any
income or capital gain realized on the disposition of "taxable
Canadian property" (TCP), (ii) required to file an income tax
return reporting the disposition, and (iii) subject to the
notification and other compliance obligations contained in section
116 of the Income Tax Act (Canada) (unless the TCP is
otherwise an "excluded property").
In very general terms, a buyer acquiring TCP from a non-resident
(even in non-arm's length situations) is required to remit a
portion of the purchase price (typically 25%, but in some cases
50%) to the Canada Revenue Agency (CRA) in respect of the
non-resident vendor's Canadian tax liability unless (i) the
non-resident vendor obtains a so-called "Section 116 clearance
certificate" from the CRA in respect of the sale, (ii) the
purchaser is satisfied that the particular property is an
"excluded property" (e.g. a listed security or property
any gain from the disposition of which would be exempt from tax in
Canada under the terms of an applicable tax treaty), or (iii) in
the case of a non-arm's length transfer of TCP, any gain from
the disposition of which would be exempt from tax in Canada under
the terms of an applicable tax treaty and the purchaser files a
special notification containing certain required information that
is certified to be true by both parties. In practice, a purchaser
will ensure it has a contractual right to withhold the required
amount from the purchase price otherwise payable to the
non-resident vendor in order to satisfy its remittance obligation,
if any.
In order to obtain a clearance certificate, a non-resident vendor
must remit an amount to the CRA on account of the
non-resident's potential tax liability, if any, or post
security. Administratively, the CRA will generally issue a
clearance certificate if is satisfied that no tax will ultimately
be due from the non-resident vendor (e.g. treaty-exempt or no
gain). In many circumstances, for example with multiple investors
in private equity funds, obtaining such certificates can be very
timing-consuming and expensive.
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.