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 Canadian real estate that forms part of the capital is distributed to a non-resident beneficiary of a trust or estate, a rollover applies pursuant to subsection 107(2). As part of the certificate of compliance process under section 116, a valuation of the property is required by the CRA, this query asks an explanation for why a valuation is required where a rollover results.
Position: See response below.
Reasons: See response below.
2025 STEP CRA Roundtable – June 17, 2025
QUESTION 15. Section 116 Compliance
Where a trust or estate (hereinafter referred to as a trust) resident in Canada derives its value primarily from Canadian real estate (or other taxable Canadian property (“TCP”) as that term is defined in subsection 248(1) of the Act), a beneficiary’s capital interest in the trust is TCP.
If Canadian real estate that forms part of the capital of a personal trust is distributed to a non-resident beneficiary of the trust, a rollover applies pursuant to subsection 107(2). We understand that as part of the certificate of compliance process under section 116, a valuation of the property is required. Can CRA explain why a valuation is required where a rollover results?
CRA Response
Provided all of the conditions for the application of subsection 107(2) have been met, the distribution of the real estate to the non-resident beneficiary will generally occur on a tax deferred basis. Since the property distributed to the non-resident beneficiary is described in subparagraph 128.1(4)(b)(i), subsection 107(5) does not apply to prohibit the rollover provided by subsection 107(2). Paragraph 107(2)(c) determines the proceeds of disposition of a beneficiary’s capital interest in the trust. Depending on the facts of a particular situation, where 107(2) is applicable, the non-resident beneficiary’s proceeds of disposition is generally equal to the adjusted cost base (“ACB”) of the property to the trust before the distribution. (footnote 1)
Where the proceeds of disposition of the capital interest in the trust, as determined by paragraph 107(2)(c), is less than its fair market value (“FMV”), the condition in subsection 116(5.1) is met. As a result, subsection 116(5.1) deems the consideration paid by the trust to be the FMV of the Canadian real estate received for the purpose of section 116.
On an administrative basis, despite subsection 116(5.1), in these circumstances the CRA will accept the rollover amount under section 107(2) as proceeds for the purpose of the issuance of a certificate of compliance under section 116, for cases where there is clearly no risk to the Canadian tax base. That would include situations where the transferred property is property described in subparagraphs 128.1(4)(b)(i) to (iii) which includes Canadian real estate. In other words, in the circumstances described, the CRA will issue a certificate of compliance under section 116 reflecting that the proceeds of disposition of the capital interest in the trust is equal to the ACB of the distributed property to the trust. The FMV of the distributed property provided to the CRA during the notification process will be listed in the notes on the certificate of compliance. This recognizes that the deferral of the capital gain in respect of the non-resident’s capital interest in the trust (which is TCP) will ultimately be realized and included in income under Part I when the non-resident beneficiary disposes of the Canadian real estate.
The documentation supporting the information required under subsections 116(1), (3) and (5.02) will depend on the nature of the disposition and the type of trust but could include the following:
- Trust agreement or will to identify the beneficiaries and of the nature of their entitlement to capital.
- Provincial probate documents to identify the assets and liabilities of the estate of a deceased (probate documents will not include assets which are not considered part of the estate).
- Final T1 return of deceased.
- Trust (T3) tax returns that have been filed.
- Financial statements and Statement of Assets and Liabilities if prepared by the trust, as these do not have to be submitted with the trust tax return.
- Reasonable support for the valuation of the property distributed.
Vicky Liu
2025-105858
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 Certain adjustments in paragraphs 107(2)(b) and (c) may impact the deemed proceeds of disposition of the beneficiary’s capital interest; however, we have assumed that none of the adjustments would apply in the current situation.
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