25 July 2008 Roundtable, 2008-0275871C6 - Form T1261 / S. 116 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.

Principal Issues: June 2008 STEP Question #7 - Form T1261 / Section 116 Certificate for dispositions of an interest in an estate resident in Canada.

Position: See the response

Reasons: The response sets out the current filing requirements, and the changes that will take place in 2009 as a result of Bill C-50.

2008 STEP National Conference
Question 7 -Form T1261

What is the purpose of form T1261? Is it a prescribed form? When must a non-resident taxpayer obtain an individual tax number?

Response

Form T1261, Application for a Canada Revenue Agency Individual Tax Number (Individual Tax Number) for Non-Residents, is used to obtain an Individual Tax Number from the CRA. An Individual Tax Number is a nine-digit number issued to individuals who need an identification number but who are not eligible to obtain a Social Insurance Number. An Individual Tax Number begins with 09. Although Form T1261 is not a prescribed form, it outlines the proof of identity and information requirements that must be fulfilled before an Individual Tax Number is issued.

An individual who has immigrated to Canada or become resident in Canada, and who is eligible to receive a Social Insurance Number but has not yet received the Social Insurance Number, can file his or her tax return without a T1261. The CRA will issue a Temporary Tax Number, and will cross-reference the information once the Social Insurance Number is acquired.

Individuals who may need to provide an Individual Tax Number to the CRA include:

• An international student who either has to file or intends to file a Canadian income tax return;
• A non-resident filing an application to waive or reduce Canadian withholding tax;
• A non-resident disposing of taxable Canadian property; or
• A non-resident who has to file or intends to file a Canadian tax return.

Instructions for completing Form T1261 can be found on the back of the form.

Dispositions of a Capital Interest in a Trust Resident in Canada

Question 9 of the 2006 STEP Round Table noted that a payment in satisfaction of all or part of a beneficiary's capital interest in a trust resident in Canada (other than a mutual fund trust in most cases) will give rise to a disposition of taxable Canadian property. Therefore, when a trust resident in Canada distributes one or more of its properties to a non-resident beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust, the beneficiary will have to obtain an Individual Tax Number, file notice under section 116, and file a return of income.

A number of significant concerns have been raised related to these distributions and the compliance burden imposed on transactions where there may be no tax liability. For this reason, the CRA will waive the requirement to file Form T1261 prior to filing notice under section 116 when a disposition results from a distribution from a personal trust, which includes an estate or testamentary trust, of money or property (other than real property) that would have been considered personal-use property of the settlor or deceased taxpayer. However, the CRA may still request a completed form T1261 when the taxpayer files a return of income in respect of the disposition.

2008 Federal Budget

The 2008 Federal Budget (now Bill C-50) proposes to amend section 116 to remove the requirement to obtain a Certificate of Compliance where the non-resident vendor disposes of property that is "treaty-exempt property", as defined in new subsection 116(6.1). In addition, Bill C-50 proposes to amend section 150 to remove the requirement for non-resident individuals to file a return of income when they dispose of taxable Canadian property that is in an "excluded disposition", as defined in new subsection 150(5). These proposals will apply in respect of dispositions that occur after 2008.

For example, assume Alex, a US resident, is the sole beneficiary of the estate of his uncle, who was a resident of Canada. The estate is resident in Canada, and Alex is not related to the executor of the estate. The estate has a calendar year-end. All of the assets of the estate are sold for cash in 2008, and the gains are taxed in the estate. In 2009, the cash is distributed to Alex and the estate is wound up.

Although the disposition of his interest in the estate does not result in a capital gain, Alex's interest in the estate is taxable Canadian property to him, and the disposition triggers the requirements of section 116. Under current legislation, Alex provides notice to the CRA under section 116 in respect of the disposition, and receives a Certificate of Compliance. Alex also has an obligation to file a T1 return of income.

However, if Bill C-50 is enacted as proposed, Alex will not be required to provide notice to the CRA under section 116 in respect of the disposition, nor will he be required to file a T1 return of income (assuming he has no other amounts payable under the Act for the year or a prior year). Alex's interest in his uncle's estate will be "treaty-exempt property" since Alex is resident in the U.S. and the gain (if any) from the disposition of the interest would be exempt from tax under Part I because of the Canada-U.S. Income Tax Convention. Furthermore, the estate will not be required to withhold under subsection 116(5) in respect of the distribution to Alex.