Last updated: March 05 2008

Budget 2008 - Treaty Protected Property

John MillBy John Mill

A non-resident is required to file a tax return in Canada if they are employed, carry on business, or if they sell "taxable Canadian property" (TCP).

This article considers the Budget 2008 rules that relate to a subset of TCP known as treaty protected property (TPP).

TCP is appreciable capital property owned by a non-resident. When a non-resident disposes of appreciable capital property s. 116 imposes a 25% withholding obligation on the purchaser.

Canada has an extensive treaty network and a number of those treaties exempt a non-resident from Canadian capital gains tax unless the property, directly or indirectly, derives its value from Canadian real estate. There are exceptions to the real estate rule for business properties.

Recently the venture capital industry in Canada has lobbied the government on behalf of US venture investors citing the drag on investment created by the s. 116 procedures. US investments in shares of non-real estate companies are TPP; however, until Budget 2008 s.116 applied across the board and caught TPP in its dragnet.

Budget 2008 proposes three changes to the s.116 process more efficient.

TPP exemption: TPP will be exempt from the s.16 withholding requirement, there is a 30 day (after sale) notice requirement for related party transactions;

Purchaser exemption: It is not enough to exempt TPP, because s.116 applies to the purchaser. Purchasers need assurance as to when they no longer have to withhold if they are wrong then they become personally liable for the 25% withholding plus penalties and interest.

"Reasonable Inquiry" Protection: Purchasers will be exempted from s.116 if they make reasonable inquires.

Currently purchasers are exempt from s.116 if they sell to Canadian residents. The reasonable inquiry is satisfied upon receipt of a declaration sworn under oath from the Vendor (unless the circumstances indicate otherwise) that they are a Canadian resident.

Budget 2008 proposes a reasonable inquiry protection for purchasers if three points are satisfied (taken from the Minister's notes) :

  • the purchaser concludes after reasonable inquiry that the vendor is, under a tax treaty that Canada has with a particular country, resident in that country;
  • the property would be treaty-protected property of the vendor if the vendor were, under the tax treaty referred to above, resident in the particular country; and
  • the purchaser sends to the Minister of National Revenue, on or before the day that is 30 days after the date of the acquisition, a notice setting out basic information about the transaction and the vendor.

Some commentators have raised concerns regarding the purchaser's ability to verify residency. In addition to declarations under oath: a number of tax authorities including the IRS will issue a "certificate of residency". US citizens and green cards holder are considered US residents.

TPP identification can be dealt with by an opinion from the vendor's lawyer or accountancy firm.

Return exemption From Filing Returns

A new twist is that for the first time non-residents will no have to file tax returns on the disposition of TCP; the conditions are (again from the Minister's notes):

  • no tax is payable under Part I of the Act by the non-resident for the taxation year;
  • the non-resident is not currently liable to pay any amount under the Act in respect of any previous taxation year (other than an amount for which the Minister of National Revenue has accepted, and holds, adequate security under section 116 or 220 of the Act); and
  • each TCP disposed of by the non-resident in the year is
    1. "excluded property" for section 116 purposes ó which, under the first change described above, will now include certain treaty-protected property, or
    2. a property in respect of the disposition of which the Minister of National Revenue has issued to the non-resident a certificate under section 116 of the Act.

These changes will apply in respect of dispositions that take place after 2008.

John Mill has practiced corporate commercial law as a sole practitioner in Windsor, Ontario for 15 years. He is the author of The Knowledge Bureauís certificate course entitled Cross Border Taxation. To Book John for your next educational event, check out his biography and call 1-866-953-4769.