10 February 2011 External T.I. 2010-0387151E5 - Deemed 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: In the hypothetical fact situation provided, is the Canadian corporation's redemption of shares held by a non-resident subject to withholdings under both subsections 212(2) and 116(5) of the Act?

Position: Yes.

Reasons: There is currently no legislation in place to prevent such a result and no CRA publication addresses this specific issue. The decision to provide administrative relief in these circumstances falls under the responsibility of the CPB.

XXXXXXXXXX
									2010-038715
									T. Posadovsky, CMA
February 10, 2011

Dear XXXXXXXXXX :

Re: Deemed Disposition of Shares by a Non-Resident

We are writing in reply to your letter dated November 15, 2011, in which you requested our comments concerning a deemed disposition of shares by a non-resident and the application of subsections 84(3), 212(2) and 116(5) of the Income Tax Act (the "Act").

Unless otherwise expressly stated, every reference herein to the "Act" or to a part, section or subsection, paragraph or subparagraph, and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended.

In your letter, you describe the following hypothetical fact situation:

• A corporation resident in Canada (the "Purchaser") redeems shares held by a non-resident of Canada (the "Vendor").
• A dividend is deemed to have been paid by the corporation and received by the non-resident shareholder pursuant to subsection 84(3) of the Act.
• In accordance with subsection 212(2), the deemed dividend is subject to a 25% withholding tax under Part XIII of the Act.
• The shares constitute taxable Canadian property such that section 116 of the Act applies and the resulting gain on the disposition is not exempt from taxation pursuant to any bilateral tax treaty.
• The non-resident shareholder has applied for a certificate under subsection 116(4) of the Act; however the certificate has not yet been delivered at the time the shares are redeemed.
• In the absence of the certificate, subsection 116(5) of the Act imposes the obligation on the Purchaser to withhold 25% of any amount by which the purchaser's cost exceeds the certificate amount.
• The non-resident shareholder and the Canadian corporation deal with each other at arm's length.

Question

Considering subsection 116(5) does not reduce the "cost to the purchaser" by the amount of any deemed dividend, the legislation appears to obligate the Purchaser to withhold tax under both subsection 212(2) and 116(5) of the Act. You wish to know whether there is a section of the Act or a Canada Revenue Agency ("CRA") policy to limit the withholding to 25% of the total purchase price.

Our Comments

Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office ("TSO") for their views. However, we are prepared to offer the following general comments that may be of assistance.

Where a share of a corporation resident in Canada is redeemed, acquired or cancelled, subsection 84(9) of the Act deems the shareholder to have disposed of the share to the corporation. 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. The withholding rate may be less where a dividend is paid or deemed paid to a resident of a country in which Canada has a tax treaty.

Section 116 of the Act requires that a non-resident vendor who disposes of certain taxable Canadian property must notify the CRA either before the disposition 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, the purchaser will be liable to withhold and remit an amount - unless the purchaser receives a certificate under subsection 116(2) or 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. If the purchaser does not obtain 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 certificate in prescribed form, the purchaser is liable to withhold 25% of the amount by which the purchaser's cost exceeds the amount indicated in such certificate.

We therefore agree with your comments that, in the hypothetical fact situation provided, the legislation requires that the Purchaser must withhold Part XIII tax pursuant to subsection 212(2) of the Act on the redemption as well as Part I tax under subsection 116(5) on the Purchaser's "cost of the property so acquired" unless a certificate under subsection 116(4) is obtained by the Purchaser.

Your second question concerned whether or not the CRA has a policy to prevent such a result. As matters of administrative policy fall within the responsibility of the CRA's Compliance Programs Branch, a non-resident vendor who is in a position where both subsection 212(2) and subsection 116(5) may apply should contact the International Tax Services Office (ITSO). Contact information for the ITSO is available at http://www.cra-arc.gc.ca/cntct/international-eng.html.

We trust that these comments will be of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch