12 June 2009 External T.I. 2008-0301701E5 - Redemption of shares

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: Assuming that the non-resident shareholder does not obtain a certificate issued under subsection 116(4) of the Act, what is the Canadian corporation's liability for withholding tax on the redemption under subsection 116(5) of the Act?

Position: If the vendor has not obtained a certificate under subsection 116(2) or 116(4) of the Act the amount of withholding is 25% of the purchaser's cost of the property. If the non-resident provides the purchaser with a section 116(2) certificate the purchaser is liable to withhold 25% of any amount by which the purchaser's cost exceeds the amount indicated in such certificate.

Reasons: Interpretation of the Act

XXXXXXXXXX 						2008-030170
								Danielle Bouffard

June 12, 2009

Dear Sir:

Re : Redemption of shares owned by a non-resident

This is in reply to your letter of November 26, 2008. You requested our comments on the applicability of subsection 116(5) of the Income Tax Act (the "Act") in a situation where an individual who is a non-resident of Canada disposes of shares which constitute taxable Canadian property and that are capital property in a manner that will trigger a deemed dividend under subsection 84(3) of the Act (i.e. a corporation resident in Canada redeems its shares for an amount in excess of the paid-up capital of those shares immediately before that time). The non-resident shareholder and the Canadian corporation deal with each other at arm's length. The non-resident shareholder does not, pursuant to subsection 116(1) of the Act, apply for a certificate under subsection 116(2) of the Act. Paragraph 116(5)(a.1) of the Act and subsection 116(5.01) of the Act are not applicable in this case.

Question

Assuming that the non-resident shareholder does not obtain a certificate issued under subsection 116(4) of the Act, what is the Canadian corporation's liability for withholding tax on the redemption under subsection 116(5) of the Act?

Our comments

The particular circumstances outlined in your message seem to 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.

Where a share of a corporation is redeemed, acquired or cancelled, subsection 84(9) of the Act deems the shareholder to have disposed of the share to the corporation. Where a Canadian corporation acquires its shares from a 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.

Under section 116 of the Act, a non-resident vendor who disposes of certain taxable Canadian property has to notify the Canada Revenue Agency (CRA) about the disposition either before he disposes of the property or within ten days after the disposition. Pursuant to subsection 116(5) of the Act, when a purchaser has acquired from a non-resident person in a taxation year any taxable Canadian property (other than depreciable property or excluded property) of the non-resident person, unless the purchaser receives a certificate under subsection 116(4) of the Act, or, after a reasonable inquiry, the purchaser has no reason to believe the non-resident is not resident in Canada, the purchaser is liable to withhold and remit an amount. If the vendor has not obtained a certificate under subsection 116(2) or 116(4) of the Act, the amount of withholding is 25% of the purchaser's cost of the property. If the non-resident provides the purchaser with a section 116(2) certificate, the purchaser is liable to withhold 25% of the amount by which the purchaser's cost exceeds the amount indicated in such certificate.

As mentioned in question 39 of the 1984 Canadian Tax Foundation Revenue Canada Round Table:

"It is clear that the liability of the purchaser under subsection 116(5) of the Act is not affected by the fact that a portion of the proceeds may be deemed to be a dividend pursuant to section 212.1 (or any other provision of the Act), since it is computed by reference to the cost to the purchaser of the property so acquired."

Therefore, in the hypothetical situation described therein, we are in agreement with your comments that the cost of the shares acquired by the Canadian corporation is not reduced by the amount of the deemed dividend realized by the non-resident shareholder on the redemption or purchase for cancellation of the shares.

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