7 November 2002 External T.I. 2002-0146345 - 116(4) Certificate

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether subsection 116(4) certificate issued to the purchaser in respect of property acquired from non-resident can be relied on in circumstances described?

Position: No.

Reasons: Subsection 116(4) was not complied with and this would be clear to the purchaser from a review of a copy of the certificate; purchaser liable for tax pursuant to subsection 116(5).

XXXXXXXXXX 	2002-014634
		Suzanie Chua
November 7, 2002

Dear XXXXXXXXXX:

Re: Subsection 116(4) of the Income Tax Act (the "Act")

This is in reply to your letter regarding a subsection 116(4) certificate issued to a non-resident vendor in the circumstances described below. We also refer to a telephone conversation with you of July 31, 2002 (XXXXXXXXXX/Chua).

The hypothetical facts you outlined are as follows:

1. A non-resident vendor disposes of taxable Canadian property with a cost base of US$20 for proceeds of US$100.

2. Based on (1), you say a US$80 capital gain was realized which, based on the relevant exchange rates, translates into CAN$120 capital gain.

3. You say that based on the Canada Customs & Revenue Agency's (the "CCRA's") inadvertence, it requested and obtained a payment of CAN$20 under paragraph 116(4)(a) based on the computation of the gain being CAN$80, rather than US$80. However, you also say that either Form T2062 submitted to the CCRA that requests a subsection 116(4) certificate or the accompanying covering letter or both contain "$100" as proceeds of disposition without reference to currency or conversion rate.

4. As a result of 3 above, the CCRA delivered a certificate (Form T2068) to the vendor and purchaser that contained a statement that the proceeds of disposition are "$100".

You asked for our interpretation of the provisions of the Act and how the CCRA will interpret the application of subsections 116(4) and (5) to the above fact scenario and in particular, whether the CCRA considers a subsection 116(4) certificate to have been issued. You say that the purchaser may take the position that the Form T2068 it received from the CCRA is a certificate issued under subsection 116(4) and accordingly is entitled to rely on it for purposes of subsection 116(5).

Comments

The situation outlined in your letter appears to involve actual transactions and identifiable taxpayers and, therefore, should be directed to the relevant tax services office. We can, however, offer the following general comments.

Where taxable Canadian property is expressed in a foreign currency, the rule set down by the Federal Court of Appeal in Gaynor v. The Queen 91 DTC 5288 is that a capital gain on the disposition thereof is computed using the cost of the property expressed in Canadian currency at the exchange rate prevailing at the time of its acquisition and the proceeds of disposition expressed in Canadian currency at the rate of exchange prevailing at the time of disposition. Therefore, the matters stated in paragraph 2 of your hypothetical facts do not appear to be in accordance with the law.

A completed Form T2062: Request by a non-resident of Canada for a certificate of compliance related to the disposition of taxable Canadian property is submitted by the non-resident vendor, pursuant to subsection 116(4) of the Act. The purpose of the section 116 procedure i.e., obtaining a payment on account of tax or security on the disposition of property, is to protect the revenue of the Crown, see paragraph 32 of Information Circular IC 72-17R4. The section 116 certificate in your hypothetical facts is invalid because the requirements stated in section 116(4) have not been complied with and furthermore, the purchaser would have known the proceeds of disposition was incorrect from a copy of the section 116 certificate he received. As a consequence, we are of the view that the purchaser is, pursuant to subsection 116(5), ultimately liable to withhold 25% of the cost to him of the property. Finally, regardless of the provisions of section 116, pursuant to section 150 of the Act, a non-resident who has disposed of taxable Canadian property, must file a return and report the correct capital gain.

We trust these comments will be of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch