Section 116

For foreign mergers occurring after September 15, 2016, will CRA accept elections of the new corporation and disposing predecessor foreign corporation for the tax deferred treatment of dispositions under proposed s. 87(8.5) prior to enactment of the legislation? CRA responded

That its longstanding position is to encourage the taxpayers to file under the proposed legislation so that, for foreign mergers prior to the enactment of Bill C-63, it would accept joint written elections. Whatever information taxpayers think would be required to justify such a transaction should be provided.

Will the CRA extend its position to exempt dispositions of shares from s. 116 notification procedures in para. 1.82 of S4-F7-C1, “Amalgamations of Canadian Corporations”, to share dispositions that are elected upon under proposed s. 87(8.4)(e)? CRA indicated

That, no, it is confining that position to s. 87(4).

Would CRA be prepared to issue clearance certificates in respect of a disposition of shares on the basis that the proceeds of disposition of the shares will be equal to their adjusted cost base to the disposing predecessor foreign corporation, and would the s. 116 notification be required to include the shares valuation? CRA responded

That for all the foreign mergers occurring after September 15, 2016, it will generally be prepared to issue a certificate of compliance under s. 116 for cases where the proceeds of disposition of the shares on the foreign merger are equal to the ACB of the predecessor foreign corporation. A valuation of the fair market value of the shares will not be required, but some backup for the ACB will be required.

The above response would also apply for s. 116 purposes in connection with valid joint elections that are filed in connection with partnership and trust interests.

A U.S. resident owned vacant land in Canada from before September 26, 1980 and after that date built a cottage thereon. CRA found:

If the cottage is substantially connected to the land and permanently improves the land, then...the cottage constructed on the property is a fixture and becomes part of the land on which it is situated.

As there was only one property, only one notification was required under s. 116 on its subsequent disposition. As the building was personal-use property rather than depreciable property, Reg. 1102(2) (excluding land upon which depreciable property is situated from depreciable property) was not relevant.

A partnership is disposing of its 25% shareholding of a listed public corporation ("Pubco"). Those shares derived more than 50% of their fair market value from Canadian real property and are not treaty-protected property for any of the partners, all of whom are non-resident and deal with each other at arm's length.

In finding that the non-resident partners are not taxable on the disposition under s. 2(3)(c) and that "section 116 has no application," CRA stated:

…subsection 96(1) does not apply for the purposes of paragraph 2(3)(c). Thus, for the purpose of determining whether the non-resident partner is taxable under subsection 2(3)…the partners of the partnership are considered to have disposed of their respective interest in the property of the partnership and paragraph 96(1)(c) does not apply….In other words, the "non-resident person" referred to in subsection 2(3) is the non-resident partner and not the partnership.

…although the partnership realizes a gain from the disposition of a TCP and a portion of the gain is allocated to the non-resident partner and included in computing his taxable income earned in Canada under paragraph 115(1)(a) and paragraph 115(1)(b), the shares are not TCP for the purposes of paragraph 2(3)(c), in respect of each non-resident partner….[U]nder common law... it may not be said that the non-resident partner owned a specific percentage of the underlying property of the partnership. Therefore, ...none of the non-resident partners is taxable in Canada on their portion of the gain realized by the partnership on the disposition of the shares of Pubco.

We believe this result to be unintended and have advised officials at the Department of Finance.

CRA was asked whether a s. 116 certificate was required when an estate with American resident executors disposed of taxable Canadian property to Canadian resident beneficiaries where the testator was an American (or, alternatively a Canadian) resident. After first assuming that the estate (a trust) was not resident in Canada under the central management and control test, and noting that the trust potentially would be deemed to be resident in Canada for various purposes under s. 94(3), CRA stated:

the trust or estate will only be deemed to be resident for certain purposes of the Act and is not deemed to be resident for the purpose of section 116. Therefore in both scenarios presented, even where the estate is deemed to be resident in Canada under the proposed amendments to section 94, section 116 will apply if the non-resident person (in this case the estate) proposes to dispose or disposes of taxable Canadian property.

In the course of a general response respecting the obligations of a Canadian estate with Polish beneficiaries, CRA indicated that when the estate (a trust) distributes assets of the trust to the non-resident beneficiaries in satisfaction of their capital interests in the trust, and those capital interests are taxable Canadian property (other than excluded property), the non-resident beneficiaries must comply with s. 116(1) or (3). CRA also stated:

There is no requirement for the trust or the non-resident to notify the CRA of the disposition of the capital interest unless the capital interest is taxable Canadian property (other than excluded property) of the non-resident.

Respecting a question as to whether the amalgamation of two non-resident corporations holding the shares of a Canadian subsidiary would be a disposition giving rise to the application of s. 116, CRA stated:

the Canadian income tax treatment of an amalgamation that does not qualify as an amalgamation under section 87 of the Act will be determined substantially by the legal consequences flowing from the corporate law under which the predecessor corporations are amalgamated. Where the applicable corporate law provides that the predecessor corporations involved in the amalgamation cease to exist, and that a new corporation is formed on the amalgamation, the predecessor corporations will generally be considered to have disposed of any property held immediately before the amalgamation. However, where the applicable corporate law suggests a "continuation type" amalgamation, the predecessor corporations will generally not be considered to have disposed of any assets that they held immediately before the amalgamation.

Respecting a disposition of taxable Canadian property by a widely-held partnership, or by a multi-tier partnerships where it is not possible to ascertain all the indirect partners, CRA stated:

it is current CRA policy to accept one notification of disposition filed on behalf of all partners on the condition that sufficient information about each individual partner is provided. Therefore, along with the one notice, the CRA requires a complete listing of the non-resident partners who are disposing of the property, including their Canadian and foreign addresses, tax identification numbers, percentage of ownership, and their respective portion of the payments or security. A partnership cannot file one income tax return on behalf of all the partners because the legislation does not provide for this filing method.

IT-474R2, para. 45 provides that a non-resident who by virtue of s. 87(4) disposes of shares which are taxable Canadian property is not required to comply with the s. 116 procedures. This position has not been changed by the amendment to s. 87(4) which deems the shares of the amalgamated corporation acquired by the non-resident to be taxable Canadian property for the period of 60 months after the amalgamation.

There is no basis for extending the administrative practice in IT-474 (allowing a taxpayer not to comply with the procedure set out in section 116 in respect of the deemed disposition of old shares on an amalgamation to which s. 87(4) is applicable) to the wind-up of a public corporation as described in s. 88(2), where the distribution by the corporation of its assets to shareholders, including non-resident shareholders, occurs after the shares are delisted from a prescribed stock exchange.

"CCRA's" Comments on Section 116 Issues", Tax Topics, No. 1576, 23 May, 2002, p. 1.

Where a non-resident redeems shares of a corporation with which it does not deal at arm's length giving rise to a deemed dividend under s. 84(3), RC views the proceeds of disposition for purposes of s. 116(1)(c) as being established under s. 116(5.1)(c) as being the fair market value of the shares, and will require adequate security to be provided with respect to the deemed dividend.

Respecting a question as to whether filing of form T2062 by a trust resident in Canada in respect of a distribution to a non-resident beneficiary would result in the application of s. 116, CRA noted that "whether a property is a TCP is a question of fact," and noted that at the 2010 annual CTF conference it had stated that

The CRA does not review or make a determination of whether a property is taxable Canadian property in the course of processing a section 116 certificate request. Accordingly, a certificate may be issued under subsection 116(2) or 116(4) in respect of property that is not taxable Canadian property.

A former resident of Canada (and after her death, her non-resident estate, which had exclusively non-resident beneficiaries) received CPP, interest and RRSP/RRIF payments from Canadian sources. Before addressing the issue of whether the non-resident executors are required to apply for CRA to issue a clearance certificate under s. 159, CRA indicated that there was an obligation of the non-resident beneficiaries who were disposing of capital interests in the estate that were taxable Canadian property, as well as of the estate if it was distributing taxable Canadian property, to apply for a s. 116 certificate.

During a Canadian posting, a diplomat purchased a property in another city for his adult child, and then sold it to the child (without applying for a s. 116 certificate) when the posting ended. The child subsequently sold the property at a loss upon leaving Canada, and applied late for a s. 116(4) certificate. After finding that there was no exemption for the diplomat in Art. 34 of the Vienna Convention on Diplomatic Relations from the s. 162(7) penalty as the property "was not held on behalf of the sending State as part of the mission," nor was there any exemption for the child, CRA stated that "you may wish to consider exercising discretion in assessing the penalty given that….there was a loss on the property."

If a non-resident holding Canadian real estate rescinds, in a subsequent taxation year, a s. 45(2) election that was made with respect to the property, when must the application for a s. 116 certificate be made? CRA stated (TaxInterpretations translation):

[T]the disposition of the taxable Canadian property occurs on the first day of such subsequent year for which the non-resident rescinds the election previously made under subsection 45(2). The notice to the Minister pursuant to section 116 respecting the disposition of the taxpayer’s taxable Canadian property must be submitted within 10 days following the disposition, namely within 10 days following the first day of such subsequent year.

A resident of Germany will gift her shares, each qualifying as a “share of the capital stock of a family farm or fishing corporation” under s. 70(10), to her Canadian-resident son who, along with his father, will be actively engaged, on a regular and continuous basis, in carrying on the corporation’s grain farming business in Canada. S. 73(4.1) would apply to the disposition. What procedures would apply under s. 116?

CRA noted: the shares were taxable Canadian property; notwithstanding the gift they would be deemed by s. 116(5.1) to be disposed of for fair market value proceeds for s. 116 purposes; they would be treaty-protected property by virtue of Art. 13(4) of the Canada-Germany Treaty and as a result of the corporation’s property being used in a farming business; and that for the shares to become treaty-exempt property under s. 116(6.1), the purchaser (i.e., the son) was required under s. 116(5.02) to provide a T2062C notice within 30 days of his acquisition. CRA then stated:

[Where] no notification is provided under subsection 116(5.02), or where the Shares are not treaty-protected property, then the non-resident vendor would be required to make the request for a certificate of compliance. … If a gain were to result, an amount in respect of tax, or acceptable security, would be required to be remitted. The non-resident would then file… [claiming under] subsection 73(4.1)…. Administratively however, in situations such as this one, the CRA may accept a T2062 which reported the proceeds of disposition in an amount equal to the adjusted cost base, and such determination would be made on a case-by-case basis. [Among other documentation]… where the transaction does not occur at arm’s length, the non-resident is to include an appraisal report…[which] would also support the assertion that subsection 73(4.1) applied….

Notwithstanding that s. 116 does not apply to shares held as inventory, RC generally will issue a certificate if it is satisfied that no Part I tax will arise on the disposition.

Where a partnership has ceased to exist, any negative adjusted cost base to a taxpayer (including a non-resident) of its partnership interest at the end of the fiscal period is deemed to be a capital gain from a disposition of its interest in the partnership – but its partnership interest is not deemed to be disposed of to the partnership (cf. s. 84(9).) Given this gap, the negative ACB gain is not subject to s. 116 even if the partnership interest was taxable Canadian property, so that there is no requirement to make a s. 116 remittance under s. 116(5) failing a s. 116 certificate.

A non-resident vendor received a deposit under an agreement for sale of B.C. real property, which will be forfeited to it due to failure of the purchaser to close. Is the deposit subject to s. 116 withholding?

CRA first stated (based on the s. 248(1) – "disposition" definition) that "there is a disposition of a right under a contract where an agreement of sale has been cancelled and the buyer's deposit is forfeited to the vendor," and noted that under s. 248(4) "where the property is a security interest derived by an agreement for sale, it is excluded from being an interest in real property and is thereby excluded from the definition of taxable Canadian property." Before referring to Howe v. Smith (1884), 27 Ch D 89 and Tang v. Zhang, 2013 BCCA 52, CRA stated that "at common law, a deposit in respect of an agreement for the sale of real property has been viewed as an earnest or security for the performance of the purchase and sale, unless there is evidence that the contract requires otherwise," and then concluded that on forfeiture of the deposit:

there would be a disposition of a security interest derived by virtue of an agreement for sale or similar obligation. Since the property disposed of would not be an interest in real property for the purposes of the Act, it would not be taxable Canadian property and would not be subject to the application of section 116.

A non-resident inter vivos trust distributes its shares of a private Canadian real estate corporation (Canco) in satisfaction of the capital interest of its sole non-resident beneficiary. CRA stated:

In accordance to [sic] subsection 116(5), in absence of a Certificate of Compliance obtained by the non-resident seller, the purchaser may incur a liability in respect of the amount he ought to have withheld on the purchase price and remitted to the Receiver General. …[A]ssuming that the property disposed of is not a treaty-protected property.. the non-resident trust should obtain a Certificate…from the Minister pursuant to subsections 116(2) or 116(4). A request could be made by the trust in order to relieve the beneficiary of any liability he might incur in application of the rules in subsection 116(5) in respect of the distribution of Canco's shares.

On the redemption of shares of a non-resident which are taxable Canadian property, any resulting deemed dividend that is subject to Part XIII tax under s. 212(2) will not reduce the amount of withholding required under s. 116(5) where no s. 116 certificate is obtained.

Where a Canadian corporation redeems its shares for an amount in excess of paid-up capital, its liability under s. 116(5) will not be reduced by the amount of the resulting deemed dividend.

Taxable Canadian property of a non-resident was expropriated by a municipality and the non-resident was paid compensation. However, the non-resident has commenced court proceedings to seek further compensation. After noting that s. 44(2) deemed there to be no disposition until the compensation was determined by the court, CRA indicated that s. 116(3) would not apply so long as such suit remained outstanding, and then stated:

Notwithstanding the fact that subsection 116(3) of the Act may not apply to the non-resident at the time of the expropriation, by virtue of the application of subsection 44(2) of the Act, subsection 116(5) of the Act will nevertheless apply to any government body at that time to require withholding from any compensation that is paid to the non-resident for expropriated property.

S.49(3) did not apply to deem the exercise of employee stock options held by a non-resident former employee to not be a disposition of the options, given that s. 49(3) applied only to capital property, whereas employee stock options are governed by s. 7. However, there was no liability under s. 116(5) to the Canadian corporation that had issued the options as it should not be considered to have acquired the options from the employee and, therefore, had no cost therefor. CRA stated "this is analogous to a situation where a debtor repaid his debt and the debt ceased to exist. That is, the CRA would generally recognize the settlement or extinguishment of the debt as a disposition of property by the creditor but not an acquisition of property by the debtor".

Where property is held by a non-resident and a resident in joint tenancy, the s. 116 certificate limit should be for half the proceeds of disposition.

"It is our understanding that where a mortgagee exercises a power of sale, pursuant to the terms of the mortgage, a court order or the provisions of the relevant Mortgage Act, title passes directly from the mortgagor to the third party purchaser. Therefore, where title to the property has passed from a Canadian resident vendor/mortgagor to a Canadian resident purchaser, albeit through a power of sale by a non-resident mortgagee, the provisions of s. 116 of the Act will not apply to any of the three parties. However, if in the above circumstances, the vendor/mortgagor had been a non-resident, subsections 116(5) or (5.3) of the Act would have applied to the purchaser."

"Where a mortgagee exercises a power of sale pursuant to the terms of the mortgage, a court order or the provisions of the relevant Mortgage Act, title passes directly from the mortgagor to the third party purchaser. Therefore ... provided the creditor does not obtain title to the property, liability for tax under subsection 116(5) or 116(5.3) does not extend to a mortgagee where the property is sold pursuant to a power of sale. However, subsection 116(5) or 116(5.3) will apply to the purchaser ... . We are not prepared to deal on a hypothetical basis with the question of whether or not... the mortgagee may forward the surplus proceeds, if any, to a non-resident mortgagor without any liability under the Act."

Where a mortgagee acquires property by means of an order of foreclosure, no amount passes to the mortgagee because neither the mortgage nor the mortgage debt is extinguished by foreclosure. Accordingly, the foreclosing mortgagee would not be considered the purchaser for purposes of s. 116. However, where the mortgagee acquires the property under an order of foreclosure and sale, under a Rice Order or from a court-appointed receiver, it will be a purchaser and, therefore, s. 116(5) or (5.3) will apply to the third-party purchaser or to the mortgagee, as the case may be.

"The provisions of section 116 of the Act apply to the redemption of a share of the capital stock of a corporation held by a non-resident if the corporation redeeming the shares is a resident of Canada and is not a public corporation, regardless of the amount of the adjusted cost base and proceeds of disposition of the share."

When asked whether the reasonable inquiry requirement was met if the purchaser obtains a statutory declaration from the vendor that the vendor is not a non-resident of Canada, and the purchaser has no reason to believe this to be false, CRA indicated that “obtaining such declaration would generally qualify as a reasonable inquiry” – and referred to “a known mailing address outside of Canada or any other indication of the vendor’s residence being outside Canada in the transaction documentation” as examples of circumstances that should put the purchaser on notice.

After noting that, as per IC72-17R6, para. 36, CRA provides an exemption for land held in inventory pursuant to which the vendor can request a "qualified business exemption" letter from its local tax services office, CRA stated:

The "qualified business exemption" letter would typically state that the purchaser is relieved of any liability under subsection 116(5.3) of the Act in respect of the purchase of any property set out in the exemption. A copy of the letter would be provided to the purchaser who would be directed not to withhold or remit any amount in respect of the sale proceeds in accordance with section 116 of the Act. The letter would also require that upon completion of the transaction the vendor would be responsible for providing details sufficient to meet the information requirements under subsection 116(5.2) of the Act.

RC's views concerning a mortgagee instituting a foreclosure action apply in all jurisdictions in Canada, whether the mortgage is registered under the "Torrens" system, or under a "registry" system.

The s. 73(4.1) rollover applies to a gift by a German resident of her shares of a family farm corporation to her son. The shares likely are Treaty-protected on the basis that the corporation’s land is used in its farming business. However, if the son fails to give a timely notice of Treaty protection to CRA under s. 116(5.02) or the Treaty exemption is not apparent, CRA considers that s. 116 withholding technically would apply to the accrued gain on the property, so that the German resident would have to claim the rollover in her income tax return to get the tax back. However, CRA then stated:

Administratively however, in situations such as this one, the CRA may accept a T2062 which reported the proceeds of disposition in an amount equal to the adjusted cost base, and such determination would be made on a case-by-case basis.

Ruling that the transfer of shares of a UK company (Forco2) by two other UK companies (Forco1 and Forco4) would be exempt under Art. XIII, para. 8 of the Canada-UK Convention on the basis of an internal estimate prepared by Canco management that the going concern value of the gas storage business carried on by Canco (which was carried on in real estate facilities held on leased land) was greater than X% of the value of the shares of Canco, and that the hydrocarbon assets of Canco did not exceed Y% of the assets of Canco.

Further ruling that provided Forco1 and Foco4 gave s. 116(5.02) notices, the shares of Forco2 will be excluded property.