Section 116

Subsection 116(1) - Disposition by non-resident person of certain property

See Also

Gambino v. The Queen, 2009 DTC 4, 2008 TCC 601 (Informal Procedure)

The endorsement to the taxpayer by her son of cheques from a disability insurer followed by her cashing those cheques and giving the cash to her son represented transfers for consideration, based on a finding that she intended to and obliged herself to bring the cash from the cashed cheques promptly back to her son.

Administrative Policy

S4-F7-C1 - Amalgamations of Canadian Corporations

deemed tcp following amalgamation

1.82 Where the shares of a predecessor corporation were taxable Canadian property of a non-resident shareholder, the postamble to subsection 87(4) deems the shares of the new corporation received by the shareholder on the amalgamation, to be taxable Canadian property of the shareholder at any time within the 60 months immediately following the amalgamation. For this reason, it is the CRA's view that a non-resident holder of shares of a predecessor corporation which constitute taxable Canadian property need not comply with the procedures set out in section 116 in respect of the deemed disposition of the old shares on an amalgamation to which subsection 87(4) is applicable.

1.83 In the context of a triangular amalgamation…, where shares of the parent are received by a non-resident whose shares of a predecessor corporation were taxable Canadian property, paragraph 87(9)(a) and subsection 87(4) deem the parent shares to be taxable Canadian property of the shareholder at any time within the 60 months immediately following the amalgamation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12) application following amalgamation 103
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1) continuity of s. 13(5.1) on amalgamation 126
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1) Amalco can continue objection and receive refunds 145
Tax Topics - Income Tax Act - Section 169 Amalco can continue objection 97
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder shareholder need not hold shares 82
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1) deemed non-arm's length relationship on amalgamation 164
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b) realted party, majority and 50% group exceptions 448
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(iii) reserve after amalgamation 50
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13) no disposition of predecessor property on general principles 103
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4) s. 87(5) not applicable 104
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3) non-87 amalgamation/no FX gain 159
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) no deemed dividend to dissenter on amalgamation 81
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) election filing by Amalco 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1) s. 87(1.1) qualifies for all s. 87 purposes 60
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2) successoring where non-wholly owned amalgamation 85
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10) deemed listing of temporary Amalco shares 114
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11) gain if high PUC is sub shares 47
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside 260
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a) new corp/deemed year end coinciding or not with acquisition of control 0
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b) Amalco must follow predecessor's valuation method subject to truer picture doctrine 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c) reserve after amalgamation 103
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d) cost amount carryover 135
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1) s. 100(2.1) applies to non-qualifying amalgamation 58
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o) no continuity rule for non-security options 133
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q) pre-amalgamation services 96
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11) loss-carry back to parent 159
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1) dovetailing with s. 88(1.1) 38
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1) 328
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3) PUC shifts 181
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4) fractional share cash/ACB or value shift/implied non-recognition for predecessor shares 247
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7) dovetailing with s. 78 and 112(12) 171
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9) allocation of s. 87(9)(c)(ii) excess as parent chooses 218
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) late designation 106
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) dovetailing with s. 87(2.1) 56
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) partnership dissolution on amalgamation 123
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) deemed non-arm's length relationship on amalgamation 415
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) deemed non-arm's length relationship on amalgamation 323
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14) class continuity on non-arm's length amalgamation 311
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b) pre-amalgamation services 96

4 December 2013 Internal T.I. 2013-0489051I7 - Personal-Use-Property & Article XIII(9)

personal-use land and building are one property

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.

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 13 personal-use land and building are one property 125

19 March 2013 Internal T.I. 2010-0385931I7 - Taxable Canadian property and Partnerships

partnership look-through

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (e) TCP rules not applying to foreign partners of partnership 266
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) partnership TCP gain but not TCP status attributed to partners 84

4 January 2013 External T.I. 2012-0448681E5 - s. 116 req. of NR-estates per draft NRT legis.

s. 94 trust is non-resident under s. 116

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.

29 March 2012 External T.I. 2010-0385771E5 - Taxation of an Estate

application to non-resident beneficiary

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.

3 December 2012 External T.I. 2012-0457741E5 - Disposition of taxable Canadian property

continuation amalgamation not a disposition

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition non s. 87 amalgamation 149

17 May 2012 IFA Roundtable, 2012-0444081C6 - 2012 IFA Seminar - Question 4

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.

11 October 2012 External T.I. 2011-0429021E5 - Administrative Position subsections 87(4)/116

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.

24 February 2003 External T.I. 2002-014995 -

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.

1993 A.P.F.F. Round Table, Q. 25

S.116 would not normally apply in a situation where a capital gain arises under s. 40(3) on a distribution of paid-up capital to a U.S. resident.

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 13 43

24 September 1992 T.I. (Tax Window, No. 24, p. 13, ¶2181)

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.

Articles

Steve Suarez, Maire-Eve Gosselin, "Canada's Section 116 System for Nonresident Vendors of Taxable Canadian Property", Tax Notes International,9 April 2012, p. 175

Detailed discussion of application procedure and considerations.

Kevin Scott, S. Sebastian Elawny, "Estate Distributions to Non-Residents", CCH Tax Topics, No. 1911, 23 October 2008, p. 1.

Jack Bernstein, "Why Canada Should End the Roadblock to Foreign Private Equity", Tax Notes International, 46/9 May 28, 2007.

Subsection 116(2) - Certificate in respect of proposed disposition

Cases

MNR v. Morris, 2010 DTC 5013 [at 6575]

A decision of the Federal Court below to require the Minister to provide the taxpayer (a trust that allegedly was resident in Barbados for purposes of the Canada-Barbados Income Tax Convention and which had disposed of shares of a Canadian corporation) with a written decision as to whether the shares were treaty exempt property, based on a conclusion of the court that the taxpayer was resident in Barbados and not a resident of Canada, was reversed.

The Federal Court should not exercise jurisdiction to entertain an application for judicial review of a refusal by the Minister to issue an s. 116 certificate (as occurred in this case) where the taxpayer could have recourse to the Tax Court by filing an income tax return and appealing the resulting assessment. Section 116 is not a provision under which the Minister must determine a person's tax liability for capital gains tax but instead "is a statutory device for requiring the withholding of tax at source for the provision of security, so that if a Part I tax liability arises, collection is facilitated" (para. 15).

Morris v. Canada (National Revenue), 2009 FC 434

The applicant taxpayers were entitled to a binding ruling from the Minister that the shares disposed of by a Barbados trust were treaty-exempt (so that there was no requirement for the purchaser to remit 25% of the purchase price in the absence of a section 116 certificate being obtained.)

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 4 102

Administrative Policy

25 June 2014 External T.I. 2012-0465221E5 - Trust distributions to non-residents

filing a T2062 not a TCP admission

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.

1992 A.P.F.F. Annual Conference, Q. 23 (January - February 1993 Access Letter, p. 59)

RC will accept, in lieu of security under s. 116(2)(b), a letter outlining the computation of the expected amount of any capital gain, including any potential reduction under s. 40(2)(b) or (c).

1992 A.P.F.F. Annual Conference, Q. 13 (January - February 1993 Access Letter, p. 55)

The requirements of s. 116 must be complied with even in the case of a capital reorganization described in s. 86.

90 C.P.T.J. - Q.28

If a non-resident requests a certificate of compliance as the result of an election in respect of a transfer under s. 85(1), RC will not issue the certificate unless the election form has been submitted with Form T2062/T2062A.

87 C.R. - Q.79

A bank guarantee, mortgage or deposit agreement enforceable in Canada normally would be considered as acceptable security.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 48 - Subsection 48(1) 25

87 C.R. - Q.87

Where a partnership containing a large number of partners is disposing of taxable Canadian property, RC is prepared to accept one form T2062 provided that a list of the names and addresses of all the partners is attached.

87 C.R. - Q.90

Tax returns, where available, provide very reliable evidence of an individual's residence status.

86 C.R. - Q.89

Where shares derive their value principally from real estate, and a new-style treaty governs, then a payment on account of tax or acceptable security will be required.

IT-150R2 "Acquisition from a Non-Resident of Certain Property on Death or Mortgage Foreclosure or by Virtue of a Deemed Disposition" /p>

IC 72-17R4 "Procedures concerning the disposition of taxable Canadian property by non-residents of Canada - Section 116"

Subsection 116(3) - Notice to Minister

See Also

Lipson v. The Queen, 2012 DTC 1064 [at 2796], 2012 TCC 20

The taxpayers received a number of capital distributions from the liquidator of their mother's "succession" (a Quebec estate), but only filed a notice under s. 116(3) respecting the final distribution. The Minister assessed penalties against the taxpayers on the basis that the taxpayer was deemed under para. (d) of the definition in s. 248(1) of disposition to have disposed of taxable Canadian property (an interest in a trust) without filing the required notices under s. 116(3) respecting the previous distributions.

Jorré J. allowed the taxpayer's appeal. As Quebec succession is not a trust, the distributions did not represent dispositions of interests in a trust. Although s. 104(1) provided that a reference to "trust" or "estate" included an executor or a liquidator of a succession, this merely facilitated a drafting technique to permit the word "trust" or "estate" to refer both to a trust or estate, and the persons charged with responsibility for carrying out the obligations of the trust or estate, as the case may be - and did not have the effect of deeming a Quebec succession to be a trust.

Serge Côté Family Trust v. Canada (Attorney General), 2010 DTC 5071 [at 6798], 2009 FC 698

The taxpayer, a non-resident family trust, transferred assets to a corporation owned by the trustee. It filed an election form (T2057) but neglected to file the T2062 form required by s. 116(3), and was assessed a $2,500 penalty by the Minister. The taxpayer appealed the Minister's assessment on the grounds that Information Circular 72-17R4 did not clearly explain the taxpayer's obligations, and so the Minister should have exercised discretion to waive the penalty. Teitelbaum J. dismissed the taxpayer's appeal. He stated (at para. 15): "nothing in [the Circular] could reasonably lead a taxpayer in the applicant's situation to conclude that it was not necessary to comply with the requirement set out in subsection 116(3) of the Act. The fact that the consequences of failure to comply with that provision is not explicitly stated in the Circular does not justify the applicant's actions, since the Income Tax Act itself was very clear on that point."

Administrative Policy

17 February 2014 Internal T.I. 2013-0498121I7 - Follow up to XXXXXXXXXX

diplomatic exemption/discretion if property sold at loss

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."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 162 - Subsection 162(7) diplomatic exemption/discretion if property sold at loss 123

25 September 2013 External T.I. 2013-0485751E5 F - Rescinding 45(2) election by a non-resident

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):

[W]hen the taxpayer rescinds the election, ITA subsection 45(2) provides that the taxpayer is deemed to have commenced to use the property [for an income-producing purpose] on the first day of the subsequent year. This deemed use results in a deemed disposition of the property at that moment. …[T]he disposition of the taxable Canadian property occurs on the first day of such subsequent year during [sic, for] which the non-resient rescinds the election previously made under ITA subsection 45(2). The notice to the Minister pursuant to ITA section 116 respecting the disposition…must be submitted within 10 days folowing the disposition, namely within 10 days following the first day of such subsequent year.

Subsection 116(4) - Certificate in respect of property disposed of

See Also

Corporation A.A.A. S.A. v. MNR, 92 DTC 1805 (TCC)

The non-resident taxpayer, which was late in filing a return reporting a capital gain on its disposition of taxable Canadian property, was unsuccessful in an argument that because it had posted security with Revenue Canada pursuant to s. 116(4) on a timely basis, it should be regarded as having made payment of the tax in question.

Administrative Policy

17 February 2017 External T.I. 2015-0602781E5 - Disposition of farm property by a non-resident

CRA may accept a T2062 showing deemed s. 73(4.1) rollover proceeds

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….

Locations of other summaries Wordcount
Tax Topics - Treaties - Articles of Treaties - Article 13 shares of Cdn farm are excluded from immovable property under Canada-Germany Treaty 136
Tax Topics - Income Tax Act - Section 116 - Subsection 116(6.1) failure to file notice within 30 days 144

8 May 1995 T.I. 950401 (C.T.O. "Meaning of Tax Cnd. pty (Shares Held as Inventory)")

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.

Subsection 116(5) - Liability of purchaser

Cases

Coast Capital Savings Credit Union v. Canada, 2016 FCA 181

rejection of apparent attempt to argue that an inflated purchase price should be bifurcated between a FMV cost and a benefit conferral

The applicant (“Coast Capital”), which was the trustee of RRSPs and RRIFs, was assessed under s. 116(5) for failure to withhold on its purchase of shares (that were taxable Canadian property) of Canadian companies from non-resident vendors at prices which were substantially in excess of those shares' fair market value (with the result that the RRSPs and RRIFs were stripped of funds which ended up in offshore accounts or were applied to pay the fees of the "promoter.") Gleason JA found that any deception of the trustee was irrelevant to the assessment, which turned only on the trustee having purchased taxable Canadian property shares from a non-resident, so that a proposed addition to the Coast Capital pleadings, alleging the purchase transactions were shams, was rejected.

Coast Capital also sought an amended pleading that the cost to it of the shares was their fair market value (arguing, para. 28, that “not all of the amount transferred was given to purchase the shares but that some portion was given for the purpose of conveying benefits to the annuitants and the promoters.”) In rejecting this proposed pleading, Gleason JA stated (at para. 31):

While Stirling…was decided in the context of interpreting the term “cost” in the context of the ITA provisions on capital gains, it applies equally to the definition of “cost” in subsection 116(5)… . The cost of the shares to Coast Capital is what it paid for them and, for purposes of discerning their cost to Coast Capital, it matters not what their actual value might have been nor how the promoters might have diverted the funds paid by Coast Capital for the shares after the funds were paid out of the RRSPs or RRIFs.

Words and Phrases
cost
Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham deceit of taxpayer was irrelevant to assessment – so that “sham” also was irrelevant 268
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base no bifurcation of inflated purchase price between FMV cost and benefit conferral 132

Olympia Trust Company v. Canada, 2015 FCA 279

RRSP trustee, not annuitant, was the "purchaser"

The Minister assessed the appellant trust company under s. 116(5) for its failure to withhold from the purchase price paid by self-directed RRSP trusts for which it was trustee from the purchase price for shares, which were taxable Canadian property, acquired from non-resident vendors (without s. 116 certificates being received). In affirming the finding below under a Rule 58 proceeding that the appellant was a purchaser under s. 116(5), Ryer JA stated (at para. 42):

[A]n acquisition by a Section 116 Purchaser of a beneficial interest in each property is not the determinative feature of the subsection 116(5) mechanism. Rather, subsection 116(5) imposes a tax upon the person to whom the Disposing Non-Resident transfers its interest in the TCP and from whom the Disposing Non-Resident receives the purchase price of such property.

Similarly, respecting an argument that the purchasers for s. 116 purposes were the RRSP trusts, he stated (at para.66):

[T]he critical element of subsection 116(5) is the paying or crediting of an amount to a Disposing Non-Resident as the purchase price or acquisition cost of the TCP that has been transferred by the Disposing Non-Resident. This action cannot be taken by a fictional person.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) fictitious s. 104(2) trust is not the purchaser 112
Tax Topics - General Concepts - Evidence contract informed by surrounding circumstances 55

See Also

Coast Capital Savings Credit Union v. The Queen, 2015 TCC 195, aff'd 2016 FCA 181

cost of shares was cash amount required to be paid rather than FMV

The trustee of RRSPs was duped into purchasing shares of Canadian companies from offshore entities at a price substantially in excess of their value, so that funds of the RRSPs were effectively stripped from the RRSPs to offshore accounts. The trustee was assessed under s. 116(5) for failure to withhold. After denying a request to amend the trustee's Notice of Appeal by adding an assertion that the purchase transactions were shams, V. Miller J went on to deny a further addition asserting that the cost of the shares for s. 116 purposes was equal to their fair market value, stating (at para. 31):

[T]he tax under paragraph 116(5)(c) is assessed on "the cost to the purchaser". ... The plain-meaning of the word "cost" in this section means the price that the taxpayer gave up in order to get the property: The Queen v Stirling, [1985] 1 FC 342 (FCA).

See summary under General Concepts – Sham.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham sham may be pleaded only by the Minister 211

Olympia Trust Company v. The Queen, 2014 TCC 372, aff'd 2015 DTC 5134 [at 6411], 2015 FCA 279

RRSP trustee, not annuitant, was the "purchaser"

The Minister assessed the appellant trust company under s. 116(5) for its failure to withhold from the purchase price paid by self-directed RRSP trusts for which it was trustee from the purchase price for shares, which were taxable Canadian property, acquired from non-resident vendors (without s. 116 certificates being received). In responding affirmatively to a Rule 58 question as to whether the appellant was a purchaser under s. 116(5), Bocock J stated (at para. 31):

The purchase moneys were in the possession, and remitted in the name of Olympia, the trustee. … While use, benefit and enjoyment arising from the shares were exclusively reserved for the Annuitant, the trust and related RRSP plan documents bifurcated the other incidents of ownership and delivered possession, title and management of that very property to Olympia, as trustee. …[N]o relevant party desired to have the Annuitant be the party from whom the purchase moneys were advanced (this would have involved an RRSP withdrawal)… .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership RRSP trustee, not annuitant, was the "purchaser" 138

Administrative Policy

May 2016 Alberta CPA Roundtable, Q.14

requested contents of a s. 115(5) remittance letter

How is a s. 116(5) or (5.3) remittance to be paid where the vendor has not filed a T2062? CRA responded:

The purchaser is not required to provide a vendor identification number.

When making the remittance to the CRA, the purchaser should attach a letter specifying that the remittance relates to subsection 116 (5) or 116(5.3)…[and]:

  • the purchaser’s full name and address
  • the non-resident vendor’s name
  • the non-resident vendor’s address (if available)
  • a description of the property (as much detail as possible)
  • the date of the acquisition
  • a copy of the purchase agreement and/or other documents, such as the Statement of Adjustments, to support the purchase price.

16 March 2015 Internal T.I. 2013-0479861I7 - Section 116 & forfeited deposits on real property

forfeited sale deposit was proceeds of security interest rather than of tcp

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) forfeited sale deposit was proceeds 77
Tax Topics - Income Tax Act - Section 248 - Subsection 248(4) forfeited sale deposit was proceeds of security interest rather than of tcp 235

2 June 2011 External T.I. 2011-0399501E5 - TCP distributed by N/R trust to N/R beneficiary

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.

10 February 2011 External T.I. 2010-0387151E5 - Deemed Disposition of Shares by a Non-Resident

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.

12 June 2009 External T.I. 2008-0301701E5 - Redemption of shares

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.

21 September 2006 Internal T.I. 2006-0201651I7 -

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.

28 November 2001 Internal T.I. 2001-009124 -

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".

6 February 1997 T.I. 962662

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.

11 October 1996 T.I. 963371 (C.T.O. "Sec 116 Exercise of Power of Sale Non-Resident Mortgagee")

"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."

24 May 1995 T.I. 950134 (C.T.O. "Section 116 - Power of Sale")

"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."

6 April 1995 T.I. 943143 (C.T.O. "Foreclosure and 116(5)")

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.

1 March 1995 External T.I. 5-940226 -

"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."

October 1989 Revenue Canada Round Table - Q.16 (Jan. 90 Access Letter, ¶1075)

Although RC acknowledges that the definition of taxable Canadian property does not include inventory, RC will not rule prior to the end of the taxation year on whether a property constitutes inventory or capital property. Therefore, it recommends that potential buyers withhold the amounts described in s. 116(5) to ward off potential liability.

88 C.R. - Q.6

Provided the creditor does not obtain title to the property, liability for tax under s. 116(5) or (5.3) does not extend to a mortgagee where the property is sold pursuant to a power of sale. However, s. 116(5) or (5.3) will apply to the purchaser.

84 C.R. - Q.39

Since the liability of the purchaser is computed by reference to the "cost" to it of the property, such liability is not affected by the fact that a portion of the proceeds may be deemed to be a dividend pursuant to S.212.1.

Articles

Vivien Morgan, "CRA on Section 116", Canadian Tax Highlights, Vol. 17, No. 9, September, 2009, p. 9.

Gabrielle M.R. Richards, "Capital Financing by Non-Residents: Section 116 Obligations", Corporate Structures and Groups, Vol. VII, No. 3, 2002, p. 375

CCRA is of the view that the cost for purposes of s. 116(5)(c) of shares acquired pursuant to a convertible share is the amount credited to the stated capital account of the shares issued on conversion.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1) 36

Subsection 116(5.2) - Certificates for dispositions

Administrative Policy

90 C.R. - Q59

RC is reviewing its practice that two notices (T2062 for capital property and T2062A for depreciable property) are required for the disposition of land and building, even where no CCA has been claimed.

89 C.P.T.J. - Q2

Non-resident federal tax rates must be used for individuals, and 36% for corporations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(5.3) 46

Subsection 116(5.3) - Liability of purchaser in certain cases

Administrative Policy

29 January 2013 External T.I. 2012-0470331E5 - S.116 - Qualified Business Exemption

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.

25 October 1993 T.I. 932460 (C.T.O. "Foreclosure Action Instituted by Mortgagee")

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.

89 C.P.T.J. - Q2

Where either the non-resident vendor or the purchaser are remitting funds on account for the non-resident's future liability, the payment should be directed to the appropriate taxation office with either a completed form T2062A or a separate letter providing the information requested on T2062A.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(5.2) 12

81 C.R. - Q.19

RC administers the requirement to withhold 50% strictly.

Where a non-resident has failed to obtain a s. 116 certificate on a transfer to its Canadian subsidiary, RC intends to administer s. 116(5.3) on the basis that it places liability on the Canadian purchaser, notwithstanding that there is a treaty exemption. However, it is realized that extenuating circumstances may arise.

IC72-17R6 "Procedures concerning the disposition of taxable Canadian property by non-residents of

Canada – Section 116" September 29, 2011

Subsection 116(5.01) - Treaty-protected property

Articles

Steve Suarez, Maire-Eve Gosselin, "Canada's Section 116 System for Nonresident Vendors of Taxable Canadian Property", Tax Notes International,9 April 2012, p. 175

Detailed discussion of limitations on the defence.

Michael N. Kandev, Fred Purkey, "Practical Troubles With the Disposition of Canadian-Situs Property by Nonresidents of Canada", Practitoner's Corner, Tax Notes International, 12 September 2011, p. 807.

Rhonda Rudick, "No Section 116 Safe Harbour", Tax Topics, 12 May 2011, No. 2044, p. 1

The author at CRA of Doc. No. 2008-0289051E5 dated 4 January 2011 orally indicated that notwithstanding the view expressed at the 2009 ICAA/CRA Roundtable - that where the property in fact turns out not to be treaty-protected property ("TPP"), "an assessment will generally not be issued if the purchaser has made every reasonable effort to determine that the property qualifies as treaty-protected and purchaser notification of the transaction (Form T2062C) is received by the CRA within 30 days" - "where the property in question is not TPP due to the status of the property itself (as opposed to the residence of the vendor), the filing of a notice does not cause all the requirements under subsection 116(5.01)(b) to be met..."

Subsection 116(6.1) - Treaty-exempt property

Administrative Policy

17 February 2017 External T.I. 2015-0602781E5 - Disposition of farm property by a non-resident

failure to file notice within 30 days

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(4) CRA may accept a T2062 showing deemed s. 73(4.1) rollover proceeds 289
Tax Topics - Treaties - Articles of Treaties - Article 13 shares of Cdn farm are excluded from immovable property under Canada-Germany Treaty 136

2012 Ruling 2011-0429961R3 - Hydrocarbon & Immovable property: Canada-UK Treaty

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.