11 March 2022 External T.I. 2019-0829251E5 - Section 119 and departure tax

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 Part XIII tax paid on a deemed dividend arising upon a redemption of shares may, by virtue of section 119, reduce the departure tax previously imposed on a capital gain realized on a deemed disposition of the shares upon the taxpayer’s departure from Canada.

Position: In the hypothetical situation described below, a credit under section 119 should be available in respect of the Part XIII tax previously paid, provided all the conditions of section 119 are met.

Reasons: Previous positions and provisions of the Act.

XXXXXXXXXX 									2019-082925
										Ina Eroff 

March 11, 2022

Dear XXXXXXXXXX,

Re: Part XIII tax on dividends and departure tax on capital gain on shares

This is in reply to your request dated October 28, 2019 for a technical interpretation where you have asked whether Part XIII tax paid on a deemed dividend arising on a redemption of shares may, in your described hypothetical situation, be used as an instalment in satisfaction of a tax payable on the deemed disposition of the shares upon the taxpayer’s departure from Canada. We apologize for the delay in responding.

Unless otherwise stated, every statutory reference herein is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

You have advised that in your hypothetical situation the relevant facts and assumptions are as follows:

1) On December 31, 2010, the taxpayer ( “Mr. A”) was a Canadian resident for purposes of the Act.

2) In February 2011, Mr. A ceased to be resident in Canada.

3) Upon ceasing to reside in Canada, Mr. A became, and remains to date, a resident of Country Y. Mr. A is a resident of Country Y for purposes of Canada’s tax treaty with Country Y.

4) At the time of his emigration from Canada, Mr. A beneficially owned, inter alia, all of the issued and outstanding Class D preferred shares and Class F preferred shares (collectively, the “Preferred Shares”) of a Canadian controlled private corporation (“CCPC”). The combined fair market value of the Preferred Shares at that time was $XXXXXXXXXX, which was equal to their aggregate redemption amount. The adjusted cost base and the paid-up capital of the Preferred Shares of each class was $XXXXXXXXXX. The Preferred Shares were capital property of Mr. A.

5) Pursuant to paragraph 128.1(4)(b), Mr. A was deemed to have disposed (the “Deemed Dispositions”) of the Preferred Shares in February 2011 for proceeds of disposition equal to their fair market value. Pursuant to paragraph 128.1(4)(c), Mr. A was deemed to have reacquired the Preferred Shares at a cost equal to the proceeds of disposition.

6) In his 2011 Canadian income tax return, Mr. A reported a total taxable capital gain of $XXXXXXXXXX, which resulted in approximately $XXXXXXXXXX of Canadian federal and provincial taxes payable for that year. The total taxable capital gain was mostly attributed to the capital gains of $XXXXXXXXXX arising from the Deemed Dispositions.

7) Mr. A elected under subsection 220(4.5) to defer the payment of tax relating to the Deemed Dispositions and provided security acceptable to the Canada Revenue Agency.

8) The CCPC now wishes to realign its capital and restructure its equity, and has proposed to Mr. A that the Preferred Shares be redeemed.

9) If the CCPC redeems the Preferred Shares as proposed, such redemptions would, under paragraph 84(3)(b), result in Mr. A being deemed to have received dividends (the “Deemed Dividends”) aggregating $XXXXXXXXXX.

10) The Deemed Dividends would, under subsection 212(2) , be subject to Canadian withholding tax (the “Part XIII tax”) of 25%.

11) The Part XIII tax of 25% in 10) would be reduced to 15% under Canada’s tax treaty with Country Y.

12) The Preferred Shares have been and will be taxable Canadian property (as defined in subsection 248(1)) of Mr. A throughout the period from emigration to the proposed redemptions, and their fair market value has not changed during that period.

13) In your view, the Part XIII tax, should there be redemptions of the Preferred Shares, represents double taxation on the gains arising from the Deemed Dispositions.

Query

You have asked whether the Part XIII tax payable on the Deemed Dividends can be used as an instalment payment on account of the Part I tax otherwise payable on the taxable capital gains realized on the Deemed Dispositions.

Our Comments

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 70-6R11, Advance Income Tax Rulings and Technical Interpretations.

When a taxpayer ceases to be a resident of Canada, he or she is deemed by paragraph 128.1(4)(b) to have disposed of certain property in the year of departure, and as a result, he or she must include in their income in the year of departure, the taxable portion of any gain arising from the deemed disposition. The payment of the tax may be deferred until the actual disposition of the property if an election is made under subsection 220(4.5).

Where a Canadian corporation redeems shares of any class of its capital stock from a shareholder (including a non-resident shareholder), subsection 84(3) deems a dividend to have been paid at that time 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, the non-resident will be subject to Part XIII tax on the dividend pursuant to subsection 212(2). Where the beneficial owner of the dividend is a resident of a country with which Canada has an income tax convention, the 25% statutory tax rate may be reduced in accordance with the provisions of the tax convention.

The deemed dividend will be excluded from the proceeds of disposition of the shares by virtue of the definition of “proceeds of disposition” in section 54. Based on the information provided, the dispositions of the Preferred Shares by Mr. A upon their redemption will result in Deemed Dividends aggregating $XXXXXXXXXX and an aggregate capital loss of $XXXXXXXXXX. However, pursuant to subsection 40(3.7) and paragraph 112(3)(b), that capital loss will be reduced by the amount of the dividends deemed received by the taxpayer in accordance with subsection 84(3) (i.e., bringing the loss to zero).

You have expressed a concern that Mr. A will be subject to double taxation as a result of the income tax payable on the taxable capital gains realized on the Deemed Dispositions of the Preferred Shares and the Part XIII tax payable on the Deemed Dividends, unless there is a mechanism to reduce the amount of tax payable as a result of the Deemed Dispositions by all or a portion of the Part XIII tax that will be paid on the Deemed Dividends.

Any amount payable on account of tax can only be reduced in accordance with provisions of the Act. We note that there is no provision in the Act allowing Mr. A to use the amount of the Part XIII tax paid on the Deemed Dividends as ‘an instalment’ in satisfaction of the Part I tax payable on the taxable capital gains realized on the Deemed Dispositions at the time of Mr. A’s departure from Canada.

However, we would point out that an amount computed by reference to the Part XIII tax paid on dividends may, under certain circumstances, be credited under section 119 against the tax payable in respect of the deemed gain realized under subsection 128.1(4), subject to the calculation set out in section 119. More specifically, provided the conditions in section 119 are met, that section allows an individual to deduct, in computing their tax otherwise payable under Part I for the taxation year in which subsection 128.1(4) treated the individual as having disposed of the shares, the lesser of two amounts. The first amount, described in paragraph 119(a), is in effect the amount of tax attributable to the taxable capital gain on the shares disposed of. The second amount, set out in paragraph 119(b), is the Part XIII tax paid by the individual on dividends that, pursuant to subsection 40(3.7), have reduced the individual’s otherwise determined capital loss from the disposition of the shares. For greater certainty, the tax payable under Part XIII in respect of dividends referred to in paragraph 119(b) is the tax payable based on the applicable treaty rate.

Pursuant to 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 in respect of a disposition in a post-departure taxation year, 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.

In the hypothetical situation you described, and if the proposed redemptions of the Preferred Shares occur, a credit under section 119 should be available to Mr. A in respect of the Part XIII tax, provided all the conditions of section 119 are met.

We trust that our comments will be of assistance.

John Meek
Acting Section Chief
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch