CRA generally confirms the use of s. 119 to reduce exit tax on CCPC shares by the Pt. XIII tax on their subsequent redemption

On exiting Canada, an individual was deemed, pursuant to s. 128.1(4)(b), to have disposed of preferred shares of a CCPC, which were taxable Canadian property and had a nominal ACB and PUC, for their fair market value, and elected under s. 220(4.5) to defer the payment of the resulting tax years later, the CCPC will now redeem the preferred shares, giving rise to a deemed dividend that is subject to a treaty-reduced withholding rate of 15%. His resulting capital loss will be reduced pursuant to ss. 40(3.7) and 112(3)(b) to nil by the amount of such deemed dividend.

CRA confirmed that, in general, the withholding tax could be credited under s. 119 against the tax payable under s. 128.14(4)(b). In particular, the individual would be allowed under s. 119 to deduct, from his tax otherwise payable for his departure taxation year the lesser of:

• the amount of tax attributable to the taxable capital gain on the deemed disposition of the shares; and
• the treaty-reduced Part XIII tax paid by the individual on that amount of the deemed dividend that, pursuant to s. 40(3.7), had reduced the individual’s otherwise determined capital loss from the share disposition.

On satisfying the s. 152(6.3) conditions, he could amend his tax return for the departure year in order to take the s. 119 deduction.

Neal Armstrong. Summary of 11 March 2022 External T.I. 2019-0829251E5 under s. 119.