23 April 2008 External T.I. 2007-0244291E5 - Disposition of taxable Canadian property

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: Does section 116 of the Act apply in a particular situation?

Position: General comments concerning the residence of an estate and the need of compliance certificate whether a trust is resident of Canada or not. General comments concerning the disposition of a capital interest in a trust resident in Canada by a non-resident beneficiary.

Reasons: Question of fact. We cannot provide a definitive answer because it would require an examination of the relevant facts to determine, inter alia, whether one of the executors is resident of the United States and to determine who exercises the management and control over the estate.

XXXXXXXXXX 							2007-024429
								Sylvie Labarre, CA
April 23, 2008

Dear Sir:

Re: Certificate of compliance issued to a non-resident vendor

This is in reply to your electronic message of July 9, 2007 in which you requested our opinion regarding the need for a certificate of compliance issued pursuant to section 116 of the Income Tax Act (the "Act") in a particular situation where an estate sells a residence.

In the scenario described in your letter, a Canadian resident deceased while owning a residence where he lived in Canada. Two executors were designated in the will of the deceased. The two executors are also the only beneficiaries of the estate. You mentioned in your letter that one of the executors is a resident of Canada and that the other executor is a resident of the United States.

The estate completed a sale of the real property and you withheld at the vendor's request, 25% of the net sale proceeds pending the issuance of a certificate of compliance, if necessary.

In your view, a certificate of compliance pursuant to section 116 of the Act is not necessary because the estate is a resident of Canada and you want to have our opinion on that issue.

Our comments

The particular circumstances outlined in your message relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Ruling, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.

In the particular situation, you indicate that there are two executors of the estate, one residing in Canada and the other residing in the United States. For the purpose of this letter, we assume that this represents the residence of the executors for the purposes of the Act. It is a question of fact whether a person is a resident of Canada or not for the purposes of the Act. You will find information about that determination in Interpretation Bulletin IT-221R3 (Consolidated), Determination of an Individual's Residence Status.

The CRA's views with respect to the residency of an estate (hereinafter referred to as a trust) are contained in Interpretation Bulletin IT-447, Residence of a Trust or Estate. The residence of an estate in Canada, or in a particular province in Canada, is a question of fact to be determined according to the circumstances in each case. However, an estate is generally considered to reside where the executor or other legal representative (hereinafter referred to as the trustee) who manages or controls the assets of the estate resides.

In certain cases, more than one trustee may be involved in exercising the management and control over the trust. If one such trustee clearly exercises a more substantial portion of the management and control than the others, the trust will reside in the jurisdiction in which that trustee resides. Where two or more trustees exercise relatively equal portions of the management and control of the trust, and trustees exercising more than 50% of such management and control reside in one jurisdiction, the trust will reside in that jurisdiction.

In some cases it may not be clear who has management and control of the trust and in these situations CRA will examine other factors relating to the trust to determine its residence. You will find in IT-447 other factors considered in those cases.

We do not have enough information about the management and control of the trust to determine whether or not the trust in your particular situation is resident in Canada. The information provided in this letter and in Interpretation Bulletin IT-447 concerning the residency status of a trust will probably help you reach a conclusion therein.

Furthermore, there may be cases where the trust will be considered a resident of Canada and also a resident of the United States under its domestic law and thereby resident of both Contracting States for purposes of the Canada-United States Income Tax Convention (1980). In these cases, the competent authority for Canada will consider all the surrounding facts to determine the strength of the trust's ties to Canada relative to the United States.

Subject to certain exceptions, section 116 of the Act applies where a non-resident person (including a trust or an estate) proposes to dispose or disposes of any taxable Canadian property. Where the trust is resident in Canada when the disposition of the property occurs, section 116 of the Act does not apply in respect of the disposition and the filing of form T2062 is not required. Otherwise, the non-resident trust has to notify the CRA about the disposition by filing form T2062 either before it disposes of the property or within ten days after the disposition.

In the case of a non-resident trust, the CRA will issue a certificate of compliance to the non-resident trust when form T2062 has been filed and when the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of property, or appropriate security for the tax. If the non-resident trust does not comply with the requirements of subsection 116(3) of the Act and the CRA has not issued a certificate of compliance, the purchaser may become liable under subsection 116(5) of the Act to pay a specified amount of tax on behalf of the vendor. You will find more information on the procedures concerning the disposition of taxable Canadian property by non-residents of Canada - Section 116 in Information Circular 72-17R5.

Assuming that a deceased individual did not leave his residence or a part of it to a spouse, a common-law partner or a spousal trust, subsection 70(5) of the Act provides for a deemed disposition of the residence immediately before the death at fair market value. The capital gain resulting from that deemed disposition, after deducting the principal residence exemption if any, is to be reported in the final return of the deceased. The acquisition cost of the residence for the estate would be equal to the fair market value immediately before the death of the deceased. The trust will have to compute its gain, if any, when it disposes of the residence using this acquisition cost. Therefore, a gain realized by the trust, if any, would include only the increase of value of the residence since the death of the deceased. Furthermore, a trust resident in Canada may designate, as a principal residence, a residence which meets the requirements of principal residence held by a personal trust in section 54 of the Act.

The distribution of the capital of a trust (or estate) resident in Canada to a non-resident beneficiary is another transaction which may result in the application of section 116 of the Act. As set out in paragraph (d) of the definition of disposition in subsection 248(1) of the Act, a payment made after 1999 in satisfaction of all or part of the beneficiary's capital interest in a trust will give rise to a disposition of all or part of the beneficiary's capital interest in the trust. A capital interest in a trust (other than a unit trust) resident in Canada is a taxable Canadian property. As mentioned above, section 116 of the Act generally applies where a taxable Canadian property is disposed of by a non-resident. The comments made above in respect of the application of section 116 of the Act where a trust that is not resident in Canada disposes of a taxable Canadian property apply also to the non-resident beneficiary. Where the non-resident beneficiary can show that no capital gain arises as a result of the disposition of the non-resident's capital interest in the trust (i.e., as shown by the calculation on form T2062), the trust will not be required to remit or post any amount as security since the amount shown on the certificate of compliance will equal the full amount of distribution.

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

Encl.(3)