Subsection 128.1(1) - Immigration
Administrative Policy
17 June 2014 External T.I. 2013-0506731E5 - Immigration
An individual shareholder immigrates to Canada, thereby becoming a Canadian resident, and then receives $1,000 from a wholly-owned non-resident corporation ("NRCo") in satisfaction of a $1,000 dividend declared before her immigration. NRCo's shares, which are not taxable Canadian property, have a fair market value of $1,000 before the dividend.
The dividend received by her after immigration would be a dividend to her at common law and under s. 90(2) only when received. The dividend receivable by her at the time of her immigration would be acquired by her under s. 128.1(1) at a cost of $1,000, whereas the shares of NRCo likely would be acquired at a nil cost in light of a dividend payable liability equal to the value of its assets. A loss triggered on NRCo's shares under s. 128.1(1) cannot be used in the post-immigration period by operation of ss. 114 and 111(9).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | note satisfied dividend | 83 |
| Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) | dividend not recognized until paid | 180 |
5 December 2013 External T.I. 2013-0485661E5 - U.K. ISA held by a temporary resident of Canada
A UK resident who opened up a a U.K. Investment Savings Account (ISA) which, as a Stock and Shares ISA, invested in shares of non-Canadian companies, then immigrated to Canada, and subsequently emigrated (so that he was a Canadian resident only in the interim).
While in Canada, dividends on the shares would be included in his income under s. 90, as well as taxable capital gains from dispositions of the shares, with the computation of the gains amount reflecting the deemed cost on immigration under s. 128.1(1)(c).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(4) - Paragraph 128.1(4)(b) | UK ISA held while temporary Canadian resident | 88 |
1999 APFF Round Table, Q. 1 (No. 9M19190)
Where an American citizen receives stock options from an American public corporation while working for it and living in the United States, and then became resident in Canada, s. 7 would apply to him if he then disposed of his rights to acquire the shares to a person with whom he was dealing at arm's length. Consequently, the exception in s. 128.1(1)(b)(v) would apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) | 46 |
Articles
Jack Bernstein, "Impact of Canada's Draft Tax Legislation on Taxpayer Migration", Tax Profile, Vol. 5, No. 30, February 1999, p. 341.
Jack Bernstein, "A Guide for the Emigrating Canadian Resident", 1993 Corporate Management Tax Conference Report, c. 12.
Lanthier, "Corporate Immigration, Emigration, and Continuance", 1993 Corporate Management Tax Conference Report, c. 4.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 128.2 - Subsection 128.2(1) | 0 | |
| Tax Topics - Income Tax Act - Section 219.1 | 0 | |
| Tax Topics - Income Tax Act - Section 250 - Subsection 250(5.1) | 0 |
Richards, "Exit Tax: Corporate Emigration and a Continuance", Canadian Current Tax, August, 1993, p. J13.
Flatters, "Proposed Amendments Relating to Corporate Continuance and Residence", 1993 Canadian Tax Journal, No. 3, p. 567.
Paragraph 128.1(1)(a)
Administrative Policy
14 November 2003 External T.I. 2003-0013445 F - Application de 94(1) et 128.1(1)
A non-resident trust deemed by s. 94(1)(c) to be a person resident in Canada throughout its 2001 taxation year had its non-resident trustees replaced by trustees resident in Canada and, as a result, it became factually resident in Canada. Did s.128.1(1) apply when the non-resident trustees were replaced?
CCRA indicated that s. 128.1(1)(a) applied from the time a trust became resident in Canada, i.e., when the non-resident trustee or trustees of the trust are replaced by a trustee or trustees resident in Canada. In the taxation year that commenced at that time, it was resident in Canada, so that s. 94 did not apply. Conversely, it was non-resident throughout the taxation year ending immediately before that time, so that s. 94 applied.
Paragraph 128.1(1)(b)
Administrative Policy
S3-F4-C1 - General Discussion of Capital Cost Allowance
Deemed acquisition
1.52 After 1992, where a taxpayer becomes a resident in Canada and owns depreciable property in a foreign country, pursuant to paragraphs 128.1(1)(b) and (c), the taxpayer is deemed to dispose of such property at the fair market value proceeds immediately prior to becoming a resident and then reacquire the property for the same amount. As a result, the capital cost of such depreciable property for CCA purposes is the fair market value of the property determined immediately before the time the taxpayer becomes a resident in Canada and is expressed in Canadian dollars. This rule does not apply to a trust to which subsection 128.1(1.1) applies or to an individual in respect of the property listed in subparagraphs 128.1(1)(b)(i) to (iv).
Non 128.1(1)(6) rule
1.54 Prior to 1993, in cases where a taxpayer became a resident in Canada and owned depreciable property in a foreign country, which is property that was and continued to be used to earn income in that foreign country, the capital cost of that property for CCA purposes is its cost. The cost of such depreciable property is converted to Canadian dollars in the manner explained in ¶1.50. The capital cost is not reduced by any depreciation allowances recognized by that foreign country.
30 September 2011 Internal T.I. 2011-0402871I7 - Taxation of accrued interest on immigration
What is the tax treatment of interest on an investment contract that accrued but was not payable while the individual was a non-resident, and the individual immigrates to Canada before the maturity of the investment? After noting that Holzhey found that "the deemed receipt of the proceeds [under s. 128.1(4)b)] triggers the inclusion in income," CRA stated:
Even though we do not see a similar 'received' or 'receivable' implication in paragraph 128.1(1)(b)...for the purpose of deemed disposition on immigration, in our view, the accrued interest on the investment contract does not lose its character immediately after immigration. Accordingly, it becomes taxable pursuant to subsection 12(4) on the first anniversary date immediately after immigration.
11 October 2001 External T.I. 2001-0100245 F - POLICE EXEMPTEE ASSUREUR NON-RESIDENT
Regarding a life insurance policy issued by a non-resident insurer to a non-resident policyholder who then immigrates to Canada, CCRA stated:
[S]ubsection 128.1(1) would be applicable. In this regard, a life insurance policy issued on the life of a person not resident in Canada at the time the policy is issued would not be a "life insurance policy in Canada" as defined in subsection 138(12), nor would it be "taxable Canadian property" within the meaning of subsection 248(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 306 - Subsection 306(1) | information required to verify that a policy issued by a non-resident insurer is an exempt policy does not exist | 83 |
30 October 2000 External T.I. 2000-0013255 - PRODUCT ISSUED BY FOREIGN INSURER
In responding to a query respecting a particular investment product acquired by a non-resident individual from a non-resident insurer where the individual later becomes a resident of Canada, CRA noted that “if a product constitutes a life insurance policy, it cannot be capital property,” and stated:
When an individual immigrates to Canada and becomes a Canadian resident, subsection 128.1(1)…generally deems that individual to have disposed of each property owned by him or her immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time and to have re-acquired each such property so disposed of for a cost equal to the amount of the deemed proceeds. These rules would generally apply to a taxpayer's interest in a life insurance policy that is not a "taxable Canadian property" as… defined for the purpose of section 128.1… by subsection 248(1)… .
Subparagraph 128.1(1)(b)(iv)
Administrative Policy
14 May 2010 External T.I. 2009-0323151E5 F - Cross Border Stock Option
An individual, who had been granted stock options by Chinaco as an employee, immigrated to Canada to work for a Canadian affiliate at a time that the options had an in-the-money value, and shortly thereafter exercised those options. In finding that the individual thereby realized a s. 7 taxable benefit that was computed in the usual manner notwithstanding that a portion of that benefit had accrued prior to his immigration, CRA noted that s. 7 benefits were excluded under s. 128.1(1)(b)(iv) and s. 128.1(10) – excluded right or interest – (c).
Paragraph 128.1(1)(c)
Cases
Landbouwbedrijf Backx B.V. v. Canada, 2019 FCA 310
When a Netherlands couple immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. of the partnership interest in 2009, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Rivoalen JA found that there was no reversible error in the Tax Court’s finding that B.V.’s central management and control (and, thus, residence for Treaty purposes) was in Canada, given the evidence that “the shareholders in Canada were making the decisions, not the director in the Netherlands” (para. 10).
Rivoalen JA went on to address the Tax Court’s finding (at para. 57) that that there had been no previous step-up to B.V. in the adjusted cost base of the partnership interest under s. 128.1(1)(c), as it was likely that B.V. had been resident in Canada from the time of the acquisition of the farm. In this regard, Rivoalen JA quoted the statement of the Tax Court (at para. 55 of its reasons) that “there was no evidence that the Appellant actually ceased to be a resident of the Netherlands or was continued under Canadian law,” and stated (at paras. 19-20):
[S]ubsection 128.1(1) … provides only for the consequences of a taxpayer becoming resident of Canada. There is no additional requirement that the taxpayer must cease being a resident of its former State … .
Accordingly, I find that the Tax Court erred when it determined that subsection 128.1(1) ... was not triggered because there was no evidence that the appellant actually ceased to be a resident of the Netherlands or was continued under Canadian law.
The appeal was allowed and the matter referred back to the Tax Court for reconsideration in light of these reasons.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 2 - Subsection 2(1) | notwithstanding sole Netherlands director, decision-making was made by the shareholders in Canada | 169 |
| Tax Topics - Treaties - Income Tax Conventions - Article 4 | potential relief under Dutch Treaty needed to be addressed even for mooted dual resident who had not been agreed by competent authorities to be a Dutch resident | 313 |
See Also
Landbouwbedrijf Backx B.V. v. The Queen, 2021 TCC 2
When a Netherlands couple immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. in 2009 of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on. The FCA found that there was no reversible error in the Tax Court’s finding that B.V.’s central management and control was in Canada. However, it referred the TCC Decision back for reconsideration inter alia of when s. 128.1(1)(c) applied to step up the cost of the partnership interest.
In finding that ss. 128.1(1)(b) and (c) did not apply, Smith J stated (at para. 35):
[T]he effective date upon which the Appellant became a resident of Canada … was when the Canadian dairy farm was acquired on June 15, 1998. Since the subject property was acquired after the Appellant became a resident of Canada, there was no deemed disposition and reacquisition for the purposes of that provision.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Income Tax Conventions - Article 4 | Dutch legal expert testimony was required in order to establish dual corporate residency - and failure to engage competent authorities | 632 |
| Tax Topics - General Concepts - Estoppel | Minister not precluded from reassessing contrary to initial acceptance of non-residency in returns as filed | 109 |
| Tax Topics - General Concepts - Evidence | need to adduce expert legal evidence as to tax residency in foreign jurisdiction | 88 |
Landbouwbedrijf Backx B.V. v. The Queen, 2018 TCC 142, confirmed on s. 2(1) grounds, remitted for reconsideration on s. 128.1(1)(c) and Treaty grounds 2019 FCA 310
When a Netherlands couple (the Backxes) immigrated to Canada in 1998 to acquire a dairy farm here, they created a structure under which the farm was held in a partnership which was held by them directly as to 51% and as to 49% through a Netherlands holding company (“B.V.”) of which the wife’s sister (a Netherlands resident) was the sole director. On a subsequent disposition by B.V. of the partnership interest, they took the position that B.V.’s gain was exempt from tax under the Canada-Netherlands Treaty, as being from the disposition of a substantial interest in a partnership holding a property (the farm) in which its business was carried on.
Smith J found that B.V. was instead subject to tax on its gain as a resident of Canada, as its central management and control was in Canada, stating (at para. 46):
[I]t was the Backxes who assumed effective and independent control of [B.V.] In most if not all instances, [the sister] was not even copied with the correspondence. This quite clearly suggests that she was a mere nominee who carried out clerical and administrative functions on behalf of the Backxes.
In going on to find that there had been no previous step-up to B.V. in the adjusted cost base of the partnership interest under s. 128.1(1)(c), he stated (at para. 57):
I find that it is more likely that the Appellant became a resident of Canada for tax purposes as early as 1998 (when the Backxes moved to Canada) and consequently, that the adjusted cost base of the Farm Partnership interest was correctly calculated from that date.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 2 - Subsection 2(1) | the central management and control of a B.V. with a sole Dutch director was in Canada | 319 |
| Tax Topics - Treaties - Income Tax Conventions - Article 4 | Netherlands corporation with central management and control in Canada was not resident in the Netherlands for Treaty purposes | 443 |
Administrative Policy
17 February 2022 External T.I. 2021-0882401E5 - Immigration and foreign life insurance policy
At the time a non-resident individual immigrated to Canada, the individual owned shares of a non-resident corporation which was the policyholder of a foreign life insurance policy on the life of the individual. On the immigration, there was a deemed disposition and acquisition of the shares for their FMV under s. 128.1(1)(b) and (c).
CRA indicated that, by virtue of s. 70(5.3), the shares were to be valued for such purposes by treating the policy as having a value equal to its cash surrender value.
In contrast, a foreign life insurance policy (which would not be an “excluded right or interest” under para. (f) of the s. 128.1(10) definition) held by a non-resident corporation when it became resident in Canada would not be subject to s. 70(5.3), and for purposes of determining its deemed cost under s. 128.1(1)(c), “would be valued in accordance with normal valuation practices taking into consideration all facts relevant to the particular case.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 70 - Subsection 70(5.3) | the CSV-valuation rule in s. 70(5.3) applies to a foreign life insurance policy of a non-resident corporation whose shares were held by an immigrating individual | 178 |
15 April 2003 External T.I. 2002-0139305 F - Immigration
At the time of his immigration to Canada in 1988, Mr. X held a 1/2 undivided interest in a US rental property with an FMV of Cdn.$650,000 (his share, Cdn.$325,000), which had been acquired in 1983 for US$300,000 (his share, US$150,000, equivalent to Cdn. $175,000). His share of additions thereafter made to the building was Cdn.$50,000, and he had deducted CCA of Cdn.$50,000 from his share of partnership income before selling his ½ interest for Cdn.$275,000.
CRA indicated that, in light of the step-up under former s. 48(3) and the subsequent cost additions, he disposed of the building at a capital loss, which was denied by s. 39(1)(b)(i). However, the step-up under s. 48(3) did not apply for CCA/recapture purposes, so that on the disposition he realized recapture of depreciation based on proceeds equal to this capital cost of ($175,000 + $50,000, or) $225,000. However, if ss. 128.1(1)(b) and (c) had applied to his immigration, he would have realized a terminal loss when he disposed of the building.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) | FTC can be generated where recapture of depreciation, and denied capital loss, are realized on a US rental building | 67 |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | step-up of partnership interest on immigration to Canada neutralized the capital gain on partnership property when partnership wound up | 146 |
Paragraph 128.1(1)(c.1)
Articles
Ron Choudhury, Neil Gurmukh, "Tax Issues on Immigration to Canada", Tax Topics (Wolters Kluwer), No. 2323, 15 September 2016, p. 1
Purposes of ss. 128.1(1)(c.1) and (c.2) (p. 3)
Paragraph 128.1(1)(c.1) provides for a deemed dividend to the immigrating corporation if the corporation owned a share of a corporation resident in Canada at the time of the deemed disposition noted above. The dividend is equal to the difference between the fair market value of the disposed share immediately before the time of disposition less the total of the paid-up capital of the share and (if the share was taxable Canadian property whose disposition is not exempt from tax by tax treaty) the amount by which its fair market value exceeded its cost amount.
This rule essentially deals with unremitted profits of a Canadian corporation to its foreign shareholder and treats the Canadian corporation as having distributed its foreign surplus to its Canadian shareholder, except to the extent that the surplus has been realised as a capital gain that is taxable in Canada and not protected by a tax treaty. Since the dividend is deemed to be paid immediately prior to the shareholder's immigration, it will be subject to non-resident withholding tax.
Paragraph 128.1(1)(c.2) provides that to the extent that an immigrating corporation elects to increase its paid-up capital after becoming a Canadian resident, it is deemed to have paid a dividend on those shares prior to its immigration into Canada. Since paid-up capital can be returned free of tax to shareholders, the deemed dividend ensures that the increase in paid-up capital reflects tax-paid surplus. The dividend is equal to the amount by which the paid-up capital of the class of shares is increased.
Paragraph 128.1(1)(d)
Articles
Brian Kearl, Carl Deeprose, "Leaving Canada's New High Tax Rate Regime: Considerations, Tips and Traps", 2016 Conference Report (Canadian Tax Foundation),32:1-24
General effect of the s. 128.1(1)(d)(iii) limitation (p. 32:13)
[T]he emigrating individual may elect to expand the application of the deemed disposition provisions … to … Canadian real estate, Canadian resource property, Canadian timber resource property and certain property used to carry on a business in Canada... . This ... is generally used to realize latent losses that may offset departure tax gains. … Effectively, any losses realized on the deemed disposition of this property may be claimed and offset only against departure tax gains.
Subsection 128.1(4) - Emigration
Administrative Policy
2020 Ruling 2019-0817051R3 - Reorganization
Following a pre-closing reorganization, including an amalgamation of Canadian corporations within the same group to form Parent Amalco, all the shares of Parent Amalco were acquired by Foreign Parent pursuant to a plan of arrangement. In addition to Canadian subsidiaries, Parent Amalco held controlled foreign affiliates directly or through a Canadian subsidiary.
Parent Amalco engaged in various transactions to increase the PUC of its shares of a Canadian subsidiary (“Corporation”) to their adjusted cost base or ACB including transferring a Canadian royalty interest (providing a net smelter return) and shares of four subsidiaries (having, depending on the subsidiary, an FMV higher or lower than their PUC, before giving effect to full s. 111(4)(e) step-ups of the appreciated shares) in consideration for preferred shares with a PUC equal to the s. 85(1) elected amount.
CRA ruled that the above steps to increase the PUC of the shares in the capital of Corporation are effective and that s. 245(2) will not be applied to alter the ruled-upon consequences.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Paid-Up Capital | transactions to increase PUC of shares of Cdn parent in sub before re-domestication of parent | 388 |
May 1999 CALU Conference No. 9908430 Q. 12
Discussion of guidelines for determining the circumstances in which RC will accept shares of a private company as security.
5 November 1996 External T.I. 9634595 - DISPOSITION OF A LIFE INSURANCE POLICY - EMIGRATION
Discussion of deemed disposition of a life insurance policy.
Articles
Firoz Talakshi, Patrick A. Jackman, "Corporate Migration: A Comparison of Canadian and US Income Tax Rules", 2001 Conference Report.
Cindy Rajan, "Are You Sure You Want To Leave Canada? The New Taxpayer Migration Rules", Personal Tax Planning, 1999 Canadian Tax Journal, Vol. 47, No. 5, p. 1342.
Lee, "Dear Departures", CA Magazine, November 1997, p. 26.
Parks, "New Departure Tax Rules and Related Proposals Create Problems", International Tax Planning, Vol. VI, No. 1, 1997, p. 373.
Couzin, "Departure Tax - Individuals", Bureau for International Fiscal Documentation, Vol. 49, No. 11, p. 532.
Bowman, "Sophisticated Estate-Planning Techniques: Cross-Border Dimensions", 1993 Conference Report, c. 38.
Paragraph 128.1(4)(b)
See Also
Barwicz v. The King, 2024 TCC 93
The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year, and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain.
In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J stated (at paras. 34, 40, 48 and 50, TaxInterpretations translation):
[I]t cannot be ruled out that the taxation year to which paragraph 94(1)(a) refers is a year other than a calendar year because of an express provision to the contrary in the ITA, in this case paragraph 128.1(4)(a). …
The Court is of the view that if Parliament had wished to exclude the application of subsection 128.1(4) pursuant to subsection 94(1), it would have done so. …
[I]t can be deduced that the purpose of subsection 128.1(4) is to crystallize and tax gains realized by a taxpayer while in Canada and before departing for another jurisdiction. …
Nor is there any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) - Paragraph 160(1)(e) | a distribution by a discretionary trust in satisfaction of a capital interest occurred for no consideration for s. 160 purposes | 392 |
| Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) | s. 94(1)(c) did not change the shortened taxation year arising under s. 128.1(4)(a) | 229 |
| Tax Topics - General Concepts - Fair Market Value - Other | capital interest in discretionary personal trust had nil value | 157 |
Administrative Policy
21 April 2015 External T.I. 2013-0494251E5 - 128.1(4) and Part XIII tax on future payments
At the time of his emigration from Canada to the US, "Mr. X" was entitled to the "Payments" from a Canadian resident who had purchased a client list for a business previously carried on by Mr. X. The Payments were based on the purchaser's use of the client list and, until emigration, had been included in Mr. X's income under s. 12(1)(g). How does s. 128.1(4)(b) apply?
CRA responded that as Mr. X's right to Payments was "property" (as defined in s. 248(1)) which was not described by the s. 128.1(4)(b) exceptions, he was deemed to have disposed of the right under s. 128.1(4)(b) for proceeds equal to its fair market value.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(v) | client list utilization payments to U.S. resident | 137 |
| Tax Topics - Treaties - Income Tax Conventions - Article 12 | client list utilization payments to U.S. resident | 180 |
5 December 2013 External T.I. 2013-0485661E5 - U.K. ISA held by a temporary resident of Canada
A UK resident who opened up a a U.K. Investment Savings Account (ISA) which, as a Stock and Shares ISA, invested in shares of non-Canadian companies, then immigrated to Canada, and less than 60 months later emigrated (so that he was a Canadian resident only in the interim).
On emigration, there would be a deemed disposition of the shares under s. 128.1(4)(b), subject to the 60-day rule in 128.1(4)(b)(iv) to the extent that the same shares were held at the time of immigration.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) | step-up of shares in UK ISA | 91 |
13 September 2012 CICA Roundtable Q. 7, 2012-0453111C6 - CICA Conference Q7 - Alter ego trust
In response to a query as to whether a taxpayer is deemed pursuant to s. 128.1(4)(b) to dispose of his or her interest in an alter-ego trust upon emigration from Canada, CRA noted that, by virtue of s. (j) of the definition in s. 128.1(10) of "excluded right or interest", that phrase includes an interest in a personal trust resident in Canada that was never acquired for consideration and did not arise as a result of a transfer of property to the trust by that individual that would be a qualifying disposition (if subsection 107.4(1) were read without ss. (h) and (i)); and further noted that s. 108(7) provides, inter alia, that for these purposes a person can contribute to the trust without failing the acquisition for consideration prohibition.
17 November 2005 External T.I. 2005-0118101E5 F - Disposition réputée
A taxpayer was deemed to realize a capital loss pursuant to s. 128.1(4)(b) on ceasing to be resident in Canada, which would be a business investment loss (BIL) if the shares were disposed of to a person with whom the taxpayer was dealing at arm's length. In finding that this condition was not satisfied (no BIL), CRA stated:
Taking into account the wording of paragraphs 128.1(4)(b) and 128.1(4)(c), we are of the view that a capital loss resulting from the application of paragraph 128.1(4)(b) is not a capital loss resulting from the disposition of a property to a person with whom the taxpayer was dealing at arm's length.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) - Subparagraph 39(1)(c)(ii) | no BIL can arise from a deemed disposition and reacquisition | 77 |
15 December 2004 External T.I. 2004-0081411E5 F - Société étrangère
A resident individual (Mr. X), after owning for 10 years 60% of the shares of a foreign corporation earning all its income from foreign sources and not paying any dividends, then permanently left Canada and became a non-resident. After referring to s. 128.1(4)(b), CRA stated:
[I]f Mr. X ceased to be resident in Canada in a taxation year, he would be deemed to have disposed of, inter alia, his shares of a foreign corporation at fair market value at the time of his departure, and the resulting gain would be required to be included in computing his income for the year.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 91 - Subsection 91(1) | overview of FAPI rules/ rules in ss. 15(1), 56(2) or 246(1) apply in addition | 53 |
25 September 2003 External T.I. 2002-0180905 F - Cessation de résidence-Conséquences fiscales
CCRA provided a review of the consequences of a Canadian resident becoming a resident of Switzerland while holding qualified small business corporation shares followed by a redemption of those shares.
Articles
David M. Sherman, Bal Katlai and Kenneth Keung, "Can an Unpaid Dividend Avoid Departure Tax?", Tax for the Owner-Manager, Vol. 24, No. 1, January 2024, p. 9
Suggested avoidance of exit tax through declaration of dividend (p. 9)
- Some have suggested that the planners believe that the s. 128.1(4)(b) departure tax on shares of a private corporation (Xco) of an emigrating individual can be avoided if Xco declares a dividend in an amount equal to the FMV of Xco‘s net assets but does not pay it until after the individual becomes non-resident, with the payment of the dividend only being subject to Part XIII tax.
S. 128.1(4)(b) capital gain on dividend payable amount (p. 9)
- However, the unpaid dividend represents a right of the individual (likely, a capital property) that is owned at the time of ceasing to be resident, so that the tax on the capital gain from the disposition thereof pursuant to s. 128.1(4)(b), plus the Part XIII tax, will equal the tax that would have been paid by the individual had the individual emigrated before the dividend declaration.
No deemed payment of dividend on emigration (p. 9)
- The position in 9640475 – that s. 128.1(4)(b) would apply to tax the individual on the emigration as if the declared and unpaid dividend had been paid - appears to be incorrect. As noted, the individual is only deemed to have disposed of the right to the dividend and not to have received it.
Subparagraph 128.1(4)(b)(iv)
Administrative Policy
30 November 2000 External T.I. 2000-0002855 F - Emigration disposition réelle convention
An individual ceased to be a resident of Canada and became a US resident and, while there, accumulated a US stock market portfolio. CCRA indicated that, if he then emigrated from Canada again within 60 months then, by virtue of the exception in s. 128.1(4)(b)(iv), s. 128.1(4)(b) would not deem a disposition of that portfolio if the shares did not constitute taxable Canadian property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 220 - Subsection 220(4.5) | return of s. 220(4.5) security only when s. 128.1(6) applied | 68 |
Subsection 128.1(6) - Returning former resident
Paragraph 128.1(6)(c)
Administrative Policy
30 July 2015 External T.I. 2013-0494871E5 - Paragraph 128.1(6)(c)
A former resident of Canada (the "Individual") who had continuously owned shares of a corporation (the "Shares"). At the time of his emigration from Canada after October 1, 1996, the "Individual" owned shares which were taxable Canadian property ("TCP"). Such shares ceased to be TCP as a result of amendments applicable after March 4, 2010. Would the election under s. 128.1(6)(c) be available to the Individual upon subsequent immigration to Canada to effectively unwind the departure tax that would have arisen under s. 128.1(4)(b) on emigration and that was deferred under s. 220(4.5)? CRA responded:
Effectively, this [s. 128.1(6)(c)] election adjusts the pre-departure proceeds of disposition and the adjusted cost base of such property on return. …[G]iven that the Shares would have been owned by the Individual throughout the time from emigration to the time of immigration and would not be TCP to the Individual at the time of immigration, paragraph 128.1(1)(b) would deem their disposal because the individual became resident in Canada and, therefore, the election in paragraph 128.1(6)(c) would be available… .[S]uch an election would be with respect to all property that is deemed to have been disposed of by the Individual pursuant to paragraph 128.1(1)(b).
Subsection 128.1(8) - Post-emigration loss
Administrative Policy
24 October 2013 External T.I. 2013-0486321E5 - Former taxable Canadian property and 128.1(8).
When Mr. X emigrated from Canada after 1 October 1996, he elected under s. 220(4.5) to defer the payment of the tax resulting from the deemed disposition under s. 128.1(4)(b) of taxable Canadian property for its fair market value. When he subsequently disposed of the property for proceeds which were lower than the property's fair market value at the time of its deemed disposition, the property no longer was "taxable Canadian property" as a result of the narrowing of this definition following the March 2010 budget. CRA stated:
[W]e note that the property sold by Mr. X is not considered to be TCP at the time of its actual disposition, as is required under paragraph 128.1(8)(b). As such, the election described under subsection 128.1(8) would not be available to Mr. X.
Subsection 128.1(10) - Definitions
excluded right or interest
(c)
Administrative Policy
26 February 2014 External T.I. 2013-0487961E5 - Excluded Right or Interest
A senior employee of Canco, who is entitled to receive "free shares" from treasury as determined by management, with a vesting period of 4 to 6 years from the grant of the rights. The individual departs from Canada (but remains an employee of Canco) before the end of the vesting period for a portion of the rights.
After noting that an agreement referred to in s. 7(1) "includes any arrangement under which a corporation agrees to issue its shares to one of its employees" (including "for no monetary consideration"), CRA stated:
Since the individual has the right to eventually (at vesting time) be issued the shares granted under the agreement, the definition of "excluded right or interest" is met…and there would be no deemed disposition of such a right on emigration by virtue of subparagraph 128.1(4)(b)(iii).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Treaties - Income Tax Conventions - Article 15 | apportionment of stock option benefits based on situs of employment during vesting period | 213 |