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: Whether withholding tax paid on dividends may be credited against a departure gain on the shares.
Position: General comments provided.
Reasons: Question of fact.
July 8, 2015
Re: Section 119 credit for tax paid
We are writing in reply to your e-mail of November 30, 2011 regarding the application of section 119 of the Income Tax Act (“Act”) in a hypothetical situation involving an individual (“Mr. X”) who was deemed by paragraph 128.1(4)(b) to have disposed of shares of a corporation (“Canco”) when he ceased to be a resident of Canada in 2009. At the time of the deemed disposition, the Canco shares were held as capital property to Mr. X. The shares were also taxable Canadian property (“TCP”), as defined in subsection 248(1) of the Act. Dividends paid by Canco to Mr. X in 2010 and 2011 were subject to withholding under Part XIII of the Act. You have asked us for clarification on the timing of the application of section 119. We apologize for the delay in responding.
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
Section 119 provides a credit to an individual who was deemed by subsection 128.1(4) to have disposed of property when they ceased to be resident in Canada, and who was subsequently subject to the “stop-loss” rule in subsection 40(3.7) on the actual disposition of that property. In order to qualify for the section 119 credit, the property that was deemed to have been disposed must have been capital property that was taxable Canadian property of the individual from the time of the individual’s emigration to the time of the subsequent actual disposition of the property.
In general, subsection 40(3.7) may reduce the loss of an individual from the disposition of a property if the individual disposed of such property at any time after having ceased to be resident in Canada and had received taxable dividends in respect of that property while the individual was a non-resident.
If, on the actual disposition of the property, subsection 40(3.7) applies, an amount computed by reference to the Part XIII tax paid on any dividends to the taxpayer subsequent to their departure from Canada may be credited against the taxes otherwise payable in respect of the deemed gain realized under subsection 128.1(4), subject to the calculation found in section 119.
Prior to the introduction of new subsection 152(6.3), a taxpayer was only permitted to amend their departure tax return to take into account a deduction under section 119 in respect of a disposition in a subsequent taxation year if the period of reassessment of paragraph 152(4)(b) was not expired.
Pursuant to new subsection 152(6.3), a taxpayer may amend their tax return for the departure year in order to take into account an amount claimed under section 119, without regard to the normal or extended reassessment periods, provided:
- The taxpayer has filed the return of income required by section 150 for the departure year,
- An amount is subsequently claimed by the taxpayer, or on the taxpayer’s behalf, for the departure year as a deduction under section 119, and
- The taxpayer files with the Minister a prescribed form amending the return on or before the filing-due date of the taxpayer for the post-departure taxation year.
These amendments generally apply to taxation years that end after October 1, 1996.
In the situation you describe, a credit under section 119 should be available to Mr. X on the actual disposition of his Canco shares, provided all the conditions of section 119 are met. We trust that our comments will be of assistance.
Olli Laurikainen, CPA, CA
Income Tax Rulings Directorate
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