12 June 2023 External T.I. 2022-0956461E5 - Part XIII tax on estate capital distributions

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: 1) Whether distributions from the capital of an estate of a deceased Canadian resident to XXXXXXXXXX resident beneficiaries are subject to withholding tax; 2) If yes, what is the process, if any, by which a non-resident beneficiary may seek a refund of the withholding tax, if applicable? 3) What forms or other documentation are required to be filed by the trustees and/or non-resident beneficiaries in respect of the distributions?

Position: 1) No. Withholding tax is generally not required on capital distributions of an estate where they are not distributions of estate income that would be subject to tax in the hands of a Canadian beneficiary, nor capital dividends that were derived or received by the estate; 2) n/a; 3) Executors and trustees are required to file NR4 form (Summary and slips) for the estate even where there is no requirement to withhold and remit Part XIII tax. Executors and trustees are also required to obtain a clearance certificate from CRA in respect of the estate.

Reasons: 1) Although 212(11) deems estate distributions to be distributions of income of the estate, 212(1)(c) withholding tax would not apply to ordinary capital distributions as they would not be amounts described in subparagraphs 212(1)(c)(i) or (ii); 2) n/a; 3) Regulation 202(1)(c) and NR4 Guide (T4061), 159(2).

XXXXXXXXXX						Income Tax Rulings Directorate
							International Tax Division
							Ann Kippen

2022-095646

June 12, 2023

Dear XXXXXXXXXX:

Re: Estate of XXXXXXXXXX
Withholding Tax on Capital Distributions from the Estate to Non-resident Beneficiaries

We are writing in response to your letter dated November 22, 2022, in which you requested guidance as to whether Part XIII withholding tax would apply to capital distributions made by a Canadian resident estate, specifically the Estate of XXXXXXXXXX (the “Estate”), to various beneficiaries who are resident in the XXXXXXXXXX for tax purposes. You also requested guidance on various filing requirements for the Estate in connection with the capital distributions to the XXXXXXXXXX resident beneficiaries.

This technical interpretation letter provides general comments about certain provisions of the Income Tax Act and related legislation that are relevant to the questions you have asked. It does not confirm the withholding tax treatment of the particular situation involving distributions from the Estate but is intended to assist you, as executors of the will and trustees of the Estate in making that determination.

All provision references in this letter are to the Income Tax Act of Canada (the “Act”) and its Regulations.

Significant Relevant Facts and Questions Asked

It is our understanding from your letter that you are both residents of Canada and as executors of the will of XXXXXXXXXX and trustees of the Estate (hereinafter your role as executors and trustees collectively referred to as “Trustees”), you are proposing to make certain distributions from the Estate to various XXXXXXXXXX resident beneficiaries of the Estate in accordance with the terms of the will of the deceased, XXXXXXXXXX. You have indicated that the assets of the Estate are now comprised solely of cash that has not been invested such that that the Estate is not earning any income. Therefore, you have advised that the proposed Estate distributions would be made from the capital of the Estate. From this, we understand that the Estate would not have any Canadian taxable income that would, if the beneficiaries were resident in Canada, be included in their taxable income pursuant to subsection 104(13). We have also assumed that the amounts to be distributed by the Estate to the non-resident beneficiaries would not reasonably be considered to be a distribution of, or derived from, an amount that the Estate received as, on account of, in lieu of or in satisfaction of a capital dividend. Our understanding and assumption in these regards are relevant for purposes of determining if withholding tax would apply, as discussed further below.

In connection with the proposed distributions to be made from the capital of the Estate to the non-resident beneficiaries, you have asked the following:

1. Is there a requirement for you as Trustees to withhold and remit Part XIII withholding tax on the capital distributions to be made by the Estate to the non-resident beneficiaries of the Estate?

2. If Part XIII tax is required to be withheld and remitted, what is the process by which a non-resident beneficiary of the Estate may seek a total or partial refund of the withholding tax, where appropriate?

3. Is there any form or other documentation that is required to filed by the Estate or the non-resident beneficiaries in connection with the capital distributions to be made by the Estate, such as an NR4, and is there an applicable exemption code to be noted on the form?

Our comments

As noted previously, our comments outlined here are general comments about the provisions of the Act and related legislation and do not confirm the tax treatment of the particular situation involving distributions from the Estate to the XXXXXXXXXX resident beneficiaries. However, our comments should assist you in determining the answers to the questions that you have raised.

1) Withholding tax

Subsection 212(11) of the Act deems an amount paid or credited by an estate to a beneficiary, for purposes of paragraph 212(1)(c) withholding tax, to have been paid or credited as income from the estate, regardless of the source from which it is derived (e.g., from capital). In other words, subsection 212(11) would apply to deem a distribution of an estate's capital to be a distribution of income of the estate for purposes of Part XIII withholding tax. However, this does not mean that the distribution is automatically subject to Part XIII withholding tax, as discussed below.

Paragraph 212(1)(c) imposes a 25% Part XIII withholding tax (which rate may be reduced under the terms of a tax treaty) on an amount of income of an estate that is paid or credited to a non-resident or that is deemed to have been so paid or credited, but only to the extent that it is an amount described in subparagraph 212(1)(c)(i) or (ii) of the Act. In general, this would be, respectively:

i) an amount of income of an estate paid to the non-resident beneficiary that would have been subject to tax under Part I of the Act if it had been paid to a person resident in Canada to whom Part I was applicable, except to the extent that the amount is deemed by subsection 104(21) of the Act to be a taxable capital gain of a non-resident investor in a mutual fund trust; or

ii) a distribution of income from an estate made by a trust or an estate to a non-resident beneficiary where that distribution may reasonably be considered to relate to a capital dividend received by the trust or estate.

Based on the foregoing, despite subsection 212(11) deeming a capital distribution to be a distribution of income of an estate, a distribution of trust capital by an estate to a non-resident beneficiary would generally not be subject to withholding tax where the distribution was not paid from an amount derived from or received by the estate as a capital dividend, given that a distribution of trust capital would not generally be subject to Part I income tax if received by a Canadian resident individual.

This interpretation of the legislation is consistent with the views that CRA has outlined in Information Circular IC 77-16R4 – Non-Resident Income Tax (paragraphs 34-37) as well as in previous technical interpretations issued by CRA (see for example documents 9409560, 9412615 and 9715265). IC 77-16R4 is available on CRA’s website (https://www.canada.ca/en/services/taxes/income-tax.html).

2) Refund Process Mechanism

Despite the conclusion above that a distribution of trust capital by an estate to a non-resident beneficiary would not be subject to withholding tax where the distribution was not an amount described in subparagraphs 212(1)(c)(i) or (ii), the following comments regarding refunds of withholding tax are provided in the interest of completeness.

As outlined in CRA Guide T4061 NR4 – Non-Resident Tax Withholding, Remitting and Reporting (also available on CRA’s website), a non-resident beneficiary may seek a refund of inappropriately withheld Part XIII tax by completing Form NR7-R, Application for Refund of Part XIII Tax Withheld and sending it to CRA no later than two years from the end of the calendar year in which the withholding tax was remitted to the CRA.

3) Reporting Distributions of Estate Capital to Non-Resident Beneficiaries to CRA

As noted previously, subsection 212(11) of the Act deems a capital distribution from an estate to be a payment of income of an estate to a non-resident beneficiary. Pursuant to Regulation 202(1)(c) of the Act, every person resident in Canada that pays or credits, or is deemed under Part XIII of the Act to pay or credit, income from an estate or trust to a non-resident person is required to file an information return in prescribed form with CRA. The prescribed form is the NR4 – Statement of amounts paid or credited to non-residents of Canada (the “NR4 form”).

Therefore, based on the legislative wording of subsection 212(11) and Regulation 202(1)(c), an estate is required to file the NR4 form to report payments made to non-resident beneficiaries even where those payments are not subject to Part XIII withholding tax. This is outlined in CRA Guide T4061 NR4 – Non-Resident Tax Withholding, Remitting and Reporting (“Guide T4061”) as well as in various public technical interpretations such as 2017-0691141C6. The NR4 form is comprised of an NR4 Summary and individual NR4 slips, copies of which are to be sent to each applicable non-resident beneficiary.

To the extent a payment to a non-resident beneficiary that is reported on an NR4 slip is exempt from withholding tax, Appendix C of Guide T4061 outlines the various exemption codes that should be used on the form. Based on this current Appendix C, the relevant exemption code for a payment of an estate’s capital to a non-resident that was exempt from withholding tax would be “S”.

We refer you to the entire Guide T4061 (available on CRA’s website) for other useful information that will be relevant to you, as Trustees of the Estate, in completing and filing the relevant NR4 summary information return and NR4 slips with CRA and sending the NR4 slips to the beneficiaries. Guide T4061 also contains information as to how to request a non-resident tax account number for the Estate from the CRA (assuming the Estate is a new filer), which number is required for purposes of filing the NR4 forms.

As an additional matter in connection with distributions by the Estate to all beneficiaries (and not just to the non-resident beneficiaries), we wish to draw your attention to subsection 159(2) of the Act and Information Circular IC82-6R13 Clearance Certificates which outline the requirement that you have, as Trustees of the Estate, to obtain a clearance certificate from CRA prior to distributing property of the Estate. In the event you distribute the Estate’s property without a clearance certificate and the Estate is left with insufficient assets to pay any amounts owed to CRA, you as Trustees would be personally liable for those amounts. Information Circular IC82-6R13 Clearance Certificates, which is available on CRA’s website, outlines the process for applying for a clearance certificate.

Finally, in your role as Trustees, we also refer you to CRA’s website for the following guides which you may find useful in connection with your tax responsibilities in respect of the deceased taxpayer and the Estate:

• T4013 – T3 Trust Guide
• T4011 – Preparing Returns for Deceased Persons

We trust that these comments will be of assistance.

Yours truly,

John Meek
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch