7 October 2016 APFF Roundtable Q. 18, 2016-0652791C6 F - Taxable Canadian property and Part XIII tax -- translation

Principal Issues: Can a non-resident individual holding shares of a Canadian corporation that have been deemed to be disposed of upon the individual's emigration from Canada but that are not taxable Canadian properties throughout the period from emigration to actual disposition benefit from the credit under section 119 in respect of Part XIII paid on dividends from the corporation?

Position: No

Reasons: The law is clear. For section 119 to apply, the shares need to qualify as taxable Canadian property throughout the period from emigration to actual disposition.

October 7, 2016 APFF Federal Roundtable - 2016 Conference

Question 18 - Taxable Canadian Property and Part XIII Tax.

Under subsection 128.1(4), emigrants from Canada are deemed to have disposed of most of their property, including all shares of private corporations, without regard to their characterization as taxable Canadian property ("TCP"). As a result, an individual may be required to pay tax on the gain realized on leaving Canada.

Section 119, for its part, provides for credit in certain cases where the loss restriction mechanism provided for in subsection 40(3.7) is applicable to an individual who ceased to be resident in Canada. Section 119 corrects for the possible overlap between the tax on the deemed disposition of capital property provided for in subsection 128.1(4) and Part XIII tax on dividends. Generally, this section provides for a credit equal to the amount of tax on those dividends up to the amount of tax on the capital gain realized by the taxpayer as a result of his or her emigration. Section 119 is only applicable to any property that is TCP and that has been the subject of a deemed disposition under subsection 128.1(4), as in the case for shares of a Canadian corporation whose value is derived principally (50% or more) from real or immovable property situated in Canada, from Canadian resource properties or from timber resource property.

In 2010, legislative amendments significantly limited the scope of the definition of TCP within the meaning of the Income Tax Act. In particular, the definition of TCP was amended to exclude all shares of private corporations, trust units and interests in partnerships whose value is not derived principally (50% or more) from real or immovable property located in Canada, from Canadian resource properties or from timber resource property.

Following the 2010 legislative amendments with respect to the definition of TCP, the scope of the credit provided for in section 119 has not been amended. As a result, all shares of private corporations, trust units and interests in partnerships whose value does not derive primarily (50% or more) from real or immovable property located in Canada, from Canadian resource properties or from timber resource property are no longer covered by this credit since they are no longer TCP.

In a request for technical interpretation following the 2010 legislative amendments, the CRA was asked to confirm whether the credit under section 119 would apply in respect of a dividend deemed to have been received on the shares of a corporation that was wound up after its emigration to the United States. The CRA merely confirmed that the credit in section 119 would be applicable to the extent that the value of such shares was derived principally (50% or more) from real or immovable property located in Canada, from Canadian resource properties or from timber resource property.

Question to CRA

Does CRA intend to modify its position and provide the subsection 119 credit respecting dividends paid on shares which are not TCP but which have been deemed to be disposed of by virtue of subsection 128.1(4)?

CRA response

The CRA is unwilling to confirm what you infer to be the underlying policy of section 119 of the Act. In addition, the CRA is unable to accept that a credit under section 119 is applicable in the circumstances presented since the wording of section 119 is very clear and provides that, to qualify for the credit, the property deemed to have been disposed of must be capital property that was a TCP throughout the period beginning with the emigration and ending at the time of the actual disposition of the property.

Sophie Larochelle
Dave Beaulne
October 7, 2016
2016-065279