5 December 2002 External T.I. 2002-0175695 - 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: The requirements of paragraph 116(4)(a) not complied with.

XXXXXXXXXX 2002-017569
Suzanie Chua
December 5, 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 that is a further to our Document 2002-014634. You asked for our interpretation of the provisions of the Act and how the Canada Customs and Revenue Agency (the CCRA) will interpret the application of subsections 116(4) and (5) to the hypothetical fact scenario as described below:

1. A non-resident vendor disposed of taxable Canadian property with a cost base of US$20 for proceeds of disposition of US$100. While a US$80 capital gain was realized for US tax purposes, based on exchange rates at the time of acquisition of the property and at the time of disposition, a $120 capital gain was realized for purposes of the Act.

2. The non-resident applied to the CCRA for a subsection 116(4) certificate and provided the CCRA with a Form T2062 that expressed the cost base, proceeds and capital gain in both US and Canadian currency.

3. The CCRA requested and obtained payment from the non-resident vendor of $20. This request was made inadvertently as it was based on a computation of 25% of an $80 capital gain rather than the actual gain of $120 as stated above.

4. The CCRA delivered a certificate in Form T2068 to the vendor and purchaser that contained a statement that the proceeds of disposition were $100.

You asked for our interpretation of the provisions of the Act and how the CCRA will interpret the application of subsection 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 the purposes of subsection 116(5).

Our 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.

In our view, the subsection 116(4) certificate (i.e., Form T2068) in your hypothetical facts is invalid because the requirements stated in subsection 116(4) have not been complied with. In particular, the non-resident vendor did not pay to the Received General 25% of the amount by which the proceeds of disposition exceed the adjusted cost base of the property, i.e., $120, as required by paragraph 116(4)(a). Furthermore, the purchaser would have been aware that the certificate was invalid because the proceeds of disposition as set out in the section 116 certificate he received did not reflect the correct proceeds of disposition, i.e., as expressed in Canadian dollars. 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.

Other Comments

With respect to item 3 of your hypothetical facts, it is our understanding that the vendor prepares and submits Form T2062 together with 25% of tax payable based on the capital gain calculation in Form T2062.

We trust these comments will be of assistance.

Yours truly,

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