19 January 2007 External T.I. 2005-0159711E5 - Disposition of shares by a non-resident

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.

Principal Issues: Is a resident of Switzerland taxable in Canada on the disposition of shares of Corporation where the purchaser is Corporation?

Position: In a situation where the purchaser of the shares of the capital stock of a corporation is that corporation, a dividend is deemed to have been paid to the shareholder pursuant to subsection 84(3) of the Act. That deemed dividend is equal to the proceeds of disposition less the paid-up capital of the shares. Pursuant to subsection 212(2), that deemed dividend will be subject to Part XIII tax. Pursuant to subsection 40(3.7) and 112(3), the capital loss resulting from the disposition would be reduced. Where the period of reassessment of paragraph 152(4)(b) is not expired, Part XIII tax paid on dividends may be credited by the amount provided in section 119 against the tax imposed on the departure gain on shares.

Reasons: Provisions of the Act.

XXXXXXXXXX 								2005-015971

January 19, 2007

Dear Sir:

Re: Disposition of shares by a non-resident

This is in reply to the facsimile you sent to the International Tax Services Office on June 10, 2005 in which you requested our opinion concerning the taxation of the gain on the disposition of the shares of a Canadian corporation that you own.

You provide us with the following facts.

You are a non-resident of Canada since XXXXXXXXXX. You are employed with XXXXXXXXXX in Switzerland.

You currently own XXXXXXXXXX class E shares of XXXXXXXXXX (hereinafter the "Corporation"), a Canadian corporation. Those shares represent XXXXXXXXXX% of the capital stock of Corporation. You are planning to dispose of XXXXXXXXXX of these shares and the purchaser will be the Corporation.

Pursuant to paragraph 128.1(4)(b) of the Income Tax Act, you were deemed to have disposed of your shares in the Corporation in XXXXXXXXXX. The value of the XXXXXXXXXX shares was $XXXXXXXXXX. The adjusted cost base and paid-up capital was $XXXXXXXXXX. The taxable capital gain was $XXXXXXXXXX. The federal tax liability on the taxable capital gain was $XXXXXXXXXX. The payment of the federal income tax was deferred until an actual sale of the shares occurs.

You understand that you will pay half the tax deferred in XXXXXXXXXX when you will sell half the shares owned at the time of departure.

Questions

You want us to confirm your understanding concerning the payment of the income tax deferred.

You want to know the tax consequences of the disposition of the XXXXXXXXXX class E shares to the Corporation for an amount of $XXXXXXXXXX per share.

Our comments

Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.

When a taxpayer ceases to be resident of Canada, he is deemed by paragraph 128.1(4)(b) to have disposed of certain property in the year of departure, and as a result, he must include in his income in the year of departure, the taxable portion of any gain arising from the deemed disposition. The payment of the tax may be deferred until the actual disposition of the property if an election is made under subsection 220(4.5) of the Act. Our Directorate cannot provide you with the amount that you will have to pay in the year of the actual disposition of the XXXXXXXXXX class E shares owned at the time of departure. We are of the view that the amount that should be paid at the time of the actual disposition of the XXXXXXXXXX class E shares will be based on the income tax payable on the deemed disposition of XXXXXXXXXX class E shares at the time of departure.

If the property is "taxable Canadian property" (as that term is defined in subsection 248(1) of the Act), the taxpayer will continue to be subject to Part I tax on the disposition of the property after the year of departure (subject to any treaty relief) by virtue of subsection 115(1) of the Act. In your particular situation, if the Canadian corporation is not listed on a prescribed stock exchange, the shares are taxable Canadian property (we suppose that the corporation is not a mutual fund corporation nor a non-resident-owned investment corporation). Therefore, if a capital gain result from the disposition, the tax convention should be examined.

However, a capital gain may not result from a disposition to the Corporation. Indeed, in a situation where a Canadian corporation acquires its shares from shareholder (including a non-resident shareholder), subsection 84(3) of the Act will deem a dividend to have been paid at that time on a separate class of shares consisting of the shares acquired to the extent that the amount paid by the corporation for the shares exceeds their paid-up capital. Where a dividend is deemed under Part I of the Act to have been paid to a non-resident, it will be subject to Part XIII tax pursuant to subsection 212(2) of the Act. Where the beneficial owner of the dividend is a resident of Switzerland, the 25% statutory tax rate will be reduced in accordance with the provisions of paragraph 2 of Article 10 of the Canada-Switzerland tax convention. In your particular situation, the tax rate would be 15% of the deemed dividend.

The deemed dividend will be excluded from the proceeds of disposition of the shares by virtue of the definition of "proceeds of disposition" in section 54 of the Act. Where the adjusted proceeds are such as to result in a capital gain, the tax convention may provide relief. However, in your particular situation, the adjusted proceeds will likely result in a capital loss.

Pursuant to subsection 40(3.7) and subsection 112(3), the capital loss will be reduced by the amount of the deemed dividend. Therefore, in your particular situation, there would be no capital loss.

Where the period of reassessment of paragraph 152(4)(b) is not expired (six years after the initial assessment of the year of departure), Part XIII tax paid on dividends may be credited under section 119 of the Act against the tax imposed on the departure gain on the shares. More specifically, section 119 of the Act will allow the individual to deduct, in computing his tax otherwise payable under Part I for the taxation year in which subsection 128.1(4) of the Act treated the individual as having disposed of the shares, the lesser of two amounts. The first amount, described in paragraph 119(a) of the Act, is in effect the amount of tax attributable to the taxable capital gain on the shares disposed of. The second amount, set out in paragraph 119(b) of the Act, is the Part XIII tax paid by the individual on dividends that, pursuant to subsection 40(3.7) of the Act, have reduced the individual's capital loss from the disposition of the shares.

Note that the tax consequences would be different if the purchaser were not the Corporation.

Under section 116 of the Act, non-resident vendors who dispose of certain taxable Canadian property have to notify the Canada Revenue Agency (CRA) about the disposition either before they dispose of the property or within ten days after the disposition. Vendors should use Form T2062 to notify the CRA of an actual or proposed disposition of shares which are taxable Canadian property. Supporting documents, which are listed in the T2062, must be attached where there is deemed dividends under subsection 84(3) of the Act or where you make a claim for exemptions under a tax convention. When the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of the property, or appropriate security for the tax, the CRA will issue a certificate of compliance to the vendor. A copy of the certificate is also sent to the purchaser. Information Circular 72-17R5 provides information on the procedures concerning the disposition of taxable Canadian property by non-residents of Canada-Section 116. This Information circular can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

We trust the above comments will be of some assistance.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch