Section 128.1

Subsection 128.1(1) - Immigration

Administrative Policy

17 June 2014 External T.I. 2013-0506731E5 - Immigration

dividend receivable acquired on 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 77
Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) dividend not recognized until paid 166

5 December 2013 External T.I. 2013-0485661E5 - U.K. ISA held by a temporary resident of Canada

step-up of shares in UK ISA

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 84

1999 APFF Round Table, Q. 1 (No. 9M19190)

stock option rights

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.

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.

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)(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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 476
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 669
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 170
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 248
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 194
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 178
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 145
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 184
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 267
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 60
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 140
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 167
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 53
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 150
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 55
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 142
Tax Topics - Income Tax Act - Section 68 153
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 65
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 117
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 403
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 65
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 142
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 207
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 299
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 214
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 259
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 191

30 September 2011 Internal T.I. 2011-0402871I7 - Taxation of accrued interest on immigration

extension of Holzhey to 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.

30 October 2000 External T.I. 2000-0013255 - PRODUCT ISSUED BY FOREIGN INSURER

applies to non-capital property

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)… .

Paragraph 128.1(1)(c)

See Also

Landbouwbedrijf Backx B.V. v. The Queen, 2018 TCC 142

no application of s. 128.1(1)(c) as central management and control had been in Canada from the time of the investment

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 303
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 361

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

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 T.I. 963459 (C.T.O. "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)

Administrative Policy

13 September 2012 CICA Roundtable Q. 7, 2012-0453111C6 - CICA Conference Q7 - Alter ego trust

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.

5 December 2013 External T.I. 2013-0485661E5 - U.K. ISA held by a temporary resident of Canada

UK ISA held while temporary Canadian resident

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 87

21 April 2015 External T.I. 2013-0494251E5 - 128.1(4) and Part XIII tax on future payments

right to client list utilization 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 133
Tax Topics - Treaties - Income Tax Conventions - Article 12 client list utilization payments to U.S. resident 172

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)

s. 128.1(6)(c) election available for shares which were TCP on previous emigration and now are not TCP on immigration

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).

property no longer tcp before sale

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

unvested rights to free shares

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 205