17 June 2025 STEP Roundtable Q. 14, 2025-1058551C6 - Late Section 116 Submission

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: If the non-resident beneficiary were to late file the notice required under subsection 116(3) and pay the applicable late filing penalty under subsection 162(7), whether the estate would be liable for the tax under subsection 116(5) and/or the penalty under subsection 227(9).

Position: The vendor (i.e. the non-resident beneficiary) filing a late notification under subsection 116(3) and paying the applicable late filing penalty would only relieve the obligation of the purchaser (i.e. the estate) if the late notification results in a certificate of compliance.

Reasons: See response below.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 14. Late Section 116 Submission

A Canadian resident individual dies, leaving in his estate a Canadian real estate property (“Property”) with a fair market value (“FMV”) of $1,000,000 and cash and marketable securities with a total FMV of $500,000.

The beneficiaries of the estate are three adult children of the individual, one of whom is resident in a country with which Canada has a tax treaty (the other two are residents of Canada). One of the Canadian resident beneficiaries is the executor of the estate, and the deceased individual’s will provides that the beneficiaries share equally in the residue of the estate. In the first tax year of the estate, the Property is sold (footnote 1) and $750,000 is distributed to the beneficiaries ($250,000 each).

As a result of that distribution, the non-resident beneficiary is considered to have disposed of a portion of their capital interest in the estate which itself is taxable Canadian property (“TCP”) according to the meaning of that term in subsection 248(1) (immediately after the death, the FMV of the Property represents more than 50% of the value of the estate’s assets). In such a situation, the estate will be considered, for the purposes of subsection 116(5), a purchaser having acquired a TCP from the non-resident beneficiary.

The non-resident beneficiary does not file a notice using Form T2062 in respect of the disposition of a portion of their capital interest in the estate as required under subsection 116(3) of the Income Tax Act (the “Act”) and the estate does not file a notice provided for in subsection 116(5.02). The failure to file notices is subsequently identified.

If the non-resident beneficiary were to late file the notice required under subsection 116(3) and pay the applicable late filing penalty under subsection 162(7), can the Canada Revenue Agency (“CRA”) advise whether the estate would be liable for the tax under subsection 116(5) and/or the penalty under subsection 227(9)?

CRA Response

As pointed out in paragraphs 50 to 58 of Information Circular IC 72-17R6, Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116 and CRA documents 2008-0275871C6 (2008 STEP CRA Roundtable, Question #7) and 2007-0244291E5, a non-resident receiving a distribution in satisfaction of an interest in a trust that is TCP is required to file notice under section 116.

CRA document 2006-0184741E5 points out that a reference to the purchaser in section 116 in respect of the disposition of a capital interest in a trust or estate is to be viewed as a reference to the trust or estate:

“For the purpose of applying section 116 of the Act, our view is that the trust or the estate making the distribution of capital to the non-resident beneficiary is considered to be the purchaser for the purposes of subsection 116(5) of the Act with the result that the trust or the estate would be liable under subsection 116(5) to pay the amount described in that subsection on behalf of the non-resident beneficiary. (See paragraphs 43 to 50 of Information Circular IC 72-17R5.)”

Paragraph 52 of Information Circular IC 72-17R6 indicates that no notice is required where the trust or estate interest is treaty-exempt property, except where the trust or estate is related to the beneficiary:

“52. Since the purchaser’s liability under subsection 116(5) does not apply to the disposition of excluded property, there is no purchaser’s liability in respect of such property. An excluded property includes a treaty-exempt property. To qualify as a treaty-exempt property, the property must be a treaty-protected property and if the vendor and purchaser are related, Form T2062C must be submitted by the purchaser. If Form T2062C is not submitted by a purchaser who is related to the vendor, a treaty-protected property will not be considered an excluded property and the regular purchaser’s liability and vendor notification requirements will apply.

In addition, the purchaser’s liability does not apply if all of the following conditions are met: (a) after reasonable inquiry, the purchaser has determined the vendor’s country of residence; (b) the property is treaty-protected under the tax treaty that Canada has with the vendor’s declared country of residence; and (c) where the vendor and purchaser are related, a T2062C is submitted by the purchaser within 30 days after the date of acquisition.”

The question does not indicate whether the trust interest is treaty-protected property. Even if it is, since the estate and the beneficiary described in the question are related, in order for the trust interest to qualify as a treaty-exempt property, the estate must file a notice (Form T2062C) under subsection 116(5.02) within 30 days after the date of the acquisition of the trust interest which was not done.

Under section 116, non-resident vendors (“Vendor”) who dispose of certain TCP have to notify the CRA of the disposition either under subsection 116(1) before they dispose of the property or within ten days after the disposition under subsection 116(3). There are no late notifications allowed under subsection 116(5.02). If the purchaser does not file the notice within the stipulated 30 days, then the Vendor is required to file notice under subsection 116(3) because the excluded property exemption is not available.

Administratively, the CRA will process a late filed notification under subsection 116(3) as long as it is complete and received on or before the due-date of the Vendor’s Part I income tax return for the taxation year during which the disposition occurred. A complete notification includes the required information as stipulated in subsection 116(3), supporting documentation and any applicable payment (or security). When the CRA has verified the information provided in the notice, the CRA will issue a certificate of compliance to the Vendor (and a copy to the purchaser).

The issuance of the certificate of compliance will relieve the purchaser of their obligation even though the notification was late.

In all cases, submission of a notification (whether under subsections 116(5.02), 116(1) or 116(3)) should be considered as early as possible in the disposition process to avoid the risk associated with subsection 116(5).

If the CRA has not issued a certificate of compliance under section 116, the estate as purchaser is liable to pay and remit the amount specified in subsection 116(5), as tax on behalf of the Vendor, and the penalty pursuant to subsection 227(9) would apply if the conditions are met, plus any applicable interest for failure to pay and remit. The purchaser is entitled to withhold that amount from the purchase price. If the purchaser does not remit the amount required under subsection 116(5) to the CRA, a purchaser liability assessment for that amount may be raised against the purchaser under subsection 227(10.1). Purchaser liability assessments are not subject to any time restrictions. Therefore, an assessment may be issued at any time the CRA becomes aware that a Vendor or purchaser has not adhered to the requirements of section 116.

In summary, the non-resident vendor (i.e., the non-resident beneficiary) filing a late notification under subsection 116(3) and paying the applicable late filing penalty under subsection 227(9) would only relieve the estate’s obligation to pay and remit the amount determined under subsection 116(5) if the late notification results in the issuance of a certificate of compliance under subsection 116(4).

For penalties and interest, the Minister has the discretion under subsection 220(3.1) to waive or cancel all or any portion of any penalty or interest if it is found that the penalty or interest resulted from circumstances beyond the control of the purchaser. For more information, refer to the current version of Information Circular IC07-1, Taxpayer Relief Provisions.

Vicky Liu
2025-105855

Response prepared in collaboration with:

Non-Resident Dispositions and International Waivers Section
Small and Medium Enterprises Directorate
Compliance Programs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. The Property is sold for proceeds of disposition of $1,000,000