29 November 2022 CTF Roundtable Q. 2, 2022-0950501C6 - Section 116 and Taxable Canadian Property

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 the CRA would consider a ruling process for a vendor or a purchaser to confirm whether a property is taxable Canadian property.

Position: Not at this point in time.

Reasons: Due to the specificity and limitation of the normal process for issuing a ruling, it does not seem practical for a ruling to be issued in situation described.

2022 CTF Annual Tax Conference
CRA Roundtable

Question 2: Taxable Canadian Property Status and Purchaser’s Obligation under Section 116

Where a non-resident of Canada disposes of taxable Canadian property (TCP) that is shares of a private corporation, interest in a partnership or interests in a trust, subsection 116(5) imposes an obligation on the purchaser to remit to the Receiver General within 30 days after the end of the month in which the purchaser acquired the property 25% of the amount by which the purchaser’s cost exceeds the certificate limit issued under subsection 116(2). At the same time, the purchaser is entitled to deduct or withhold the amount remitted from the purchase price paid or credited to the non-resident vendor. The failure to remit under subsection 116(5) could result, in the hands of the purchaser, in penalties and interest in addition to the tax payable on capital gains realized on the disposition.

There are exceptions to the remittance obligation as described above. For example, the purchaser would not be obligated to remit where, after reasonable enquiry, such purchaser has no reason to believe that the vendor is a non-resident of Canada. Nor would the purchaser be liable to remit where the property is treaty-protected property.

The legislation does not provide an exception where, after reasonable enquiry, the purchaser believes that the property is not TCP. The Canada Revenue Agency (the “CRA”) confirmed at the 2010 Canadian Tax Foundation Conference that it does not make determinations of whether a property is TCP in the course of processing a section 116 certificate request.

The determination of whether shares of a private corporation, interests in a partnership or interests in a trust are TCP can be complicated because it must be determined if at any time in the previous 60-month period more than 50% of the fair market value of the share or interest was derived directly or indirectly from real or immovable property, Canadian resource properties, timber resource properties or options or interests in these properties. Even if the non-resident vendor believes that the property disposed of is not TCP, a purchaser may choose to withhold and remit 25% of the purchase price to the CRA to avoid the potential liability exposure under subsection 116(5). Although the amount remitted can be recovered by the non-resident vendor when a tax return reporting the disposition is filed, there can be serious financial consequences of not having 25% of the purchase price available on closing.

Would the CRA consider a ruling process for a seller or a purchaser to confirm whether a property is TCP?

CRA Response

The general purpose of section 116 is to establish a procedure to collect tax on capital gains realized by non-resident vendors on a disposition of TCP and certain other property that is not otherwise excluded. Where section 116 applies to a disposition of shares of a private corporation, interests in a partnership or interests in a trust that are TCP (the “described property”) and no certificate was obtained under subsection 116(2) or 116(4), the purchaser is liable to remit 25% of the purchase price of the property to the Receiver General and can withhold that portion of the purchase price.

Where, in relation to a disposition of the described property, the vendors do not notify the CRA in accordance with subsection 116(1) or 116(3) or do not make the payment or furnish the security required to obtain the clearance certificate under subsection 116(2) or 116(4) based on the view that the property disposed of is not TCP, the purchaser may choose to withhold and remit under subsection 116(5) to guard against being liable for the payment of the tax payable on the realized capital gain, related interest and penalties, should the CRA conclude otherwise.

There is no program offered by the CRA to confirm before the transfer of a property or before an audit whether the property is TCP. The CRA stated in interpretation 2012-0465221E5 that the onus of determining if a property is TCP is on the taxpayer.

The advance income tax ruling program administered by the CRA’s Income Tax Rulings Directorate (the “ITRD”) offers confirmation of how the CRA will interpret specific provisions of Canadian income tax law that are relevant to a definite transaction or transactions that a taxpayer is contemplating. As described in the most recent version of Information Circular IC70-6, Advance Income Tax Rulings and Technical Interpretations (“IC70-6”), an advance income tax ruling will not determine or confirm the fair market value of a property. Although the advance income tax ruling letter might indicate the fair market value of property as represented by the taxpayer making the request, it is standard practice for the letter to caveat that information from the confirmations provided.

Another limitation of the program involves situations where the determination is primarily factual, or where the application of a provision is conditional on the existence of facts. In this regard, advance income tax rulings have sometimes been issued on provisions involving primarily a determination of facts where sufficient supporting facts and evidence were provided. However, advance income tax ruling letters always indicate that the confirmation they provide is conditional on the disclosure of all the relevant facts and information.

The level of certainty and assurance that could be offered by an advance income tax ruling that determines whether a property is TCP would need to be ascertained in light of such qualifications, caveats and disclaimers. The caveat turning on the accuracy of the valuations provided by the taxpayer and supporting the advance income tax ruling request along with the caveat related to the disclosure of all the relevant information in respect of the entire period covered by the definition of TCP would be particularly relevant.

Timeliness is another factor that would likely be considered to ascertain whether the advance income tax rulings process would facilitate the commercial transaction. For purposes of an advance income tax ruling request on the determination of whether a property is TCP, the timeline would include both the time to prepare the relevant valuations and other information required to substantiate the position that the particular property is not TCP over the relevant period and the time required for the CRA to process the request.

If a taxpayer identifies a particular interpretative issue that may inform the determination of a property’s TCP status, including whether the methodology used is consistent with the text, context and purpose of the Act in general and more specifically of the definition of TCP in subsection 248(1), the taxpayer might want to consider requesting a pre-ruling consultation from the ITRD as described in IC70-6 for views on whether the ITRD would be in a position to consider the issue in the context of an advance income tax ruling request.

In situations where the purchaser insists on bearing no risk under subsection 116(5), even when the vendor believes that the property is not TCP, the vendor might consider requesting a clearance certificate under subsection 116(2) or 116(4) by paying to the Receiver General the estimated amount of tax or by furnishing the CRA with acceptable security upon notifying the CRA of the proposed or concluded disposition. By doing so, the remittance liability of the purchaser under subsection 116(5) could be decreased or eliminated. In this regard, interpretation letter 2012-0465221E5 along with a response at CRA round table presented at the 2010 Canadian Tax Foundation Conference indicated that the filing of form T2062 would not be viewed as a declaration that the property disposed of is TCP and the CRA would not consider the property to be TCP on that basis only.

For more information on section 116, see Information Circular IC72-17R6 Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116.

Grace Tu
2022-095050
November 29, 2022