Simplified Section 116 Clearance Certificate Procedures
New Canadian tax rules, as they pertain to the sale of property by non-residents, came into effect at the beginning of 2009. The new procedures aim to further simplify the current clearance certificate process (which was already "simplified" back in 2007 to avoid unnecessary delays – see David Smith’s Bar-Ex commentary in 2007 on this issue here and on our blog).
Withholding tax requirements under section 116 of Canada’s Income Tax Act (the "Act") may arise whenever a non-resident is involved in a transaction. Non-resident vendors and purchasers can be liable for payment of Canadian income tax on the disposition of certain types of Canadian based property, such as shares of Canadian companies, Canadian real estate, and beneficiaries of Canadian estates and trusts. In the estates and trusts context, non-resident beneficiaries were previously required to obtain an Individual Tax Number, a Canadian Social Insurance number, or a Temporary Taxation Number before a clearance certificate would be issued. In estate administrations involving non-resident beneficiaries, therefore, ITN numbers would need to be obtained (by the non-resident beneficiaries) in order for the estate trustee to obtain a section 116 clearance certificate. This often resulted in the requirement of the estate trustee to withhold funds from the distribution (and remit to the CRA if necessary).
My review of the new rules indicates that the purchaser now has an alternative to the current Certificate of Compliance procedures when the property in question is "treaty protected". An associated form T2062C ("Notification of an Acquisition of Treaty-Protected Property from a Non-Resident Vendor") may now in certain cases eliminate the requirement to obtain ITN’s. To rely on the new rules, the purchaser must (1) determine that the non-resident vendor is a resident of a country with which Canada has a tax treaty; and (2) must also be satisfied that the property is treaty-protected. If the purchaser is in fact satisfied with these requirements, withholding can be eliminated if the purchaser sends the form T2062C Notification to the CRA within 30 days of the acquisition.
In any event, whenever a non-resident disposes of Canadian based property, the application of the withholding rules of s.116 of the Act should be considered and advice from a tax professional should be obtained.
Sarah Hyndman Fitzpatrick