Canada’s taxation rules regarding taxable Canadian properties (TCP) are generally complex, and opportunities arising from specific situations may be overlooked as a result. For example, when a non-resident of Canada disposes of a TCP after departing Canada, compliance requirements regarding the disposition may arise, but so could an opportunity to reduce prior assessed departure tax.
When a non-resident of Canada disposes of TCP, the non-resident is required to notify the Canada Revenue Agency (CRA) within 10 days of the disposition to determine the amount of taxes payable on the disposition. This notification is generally done by filing Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, and when applicable, Form T2062A, Request by a Non-resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource or Timber Resource Property, Canadian Real Property (Other Than Capital Property), or Depreciable Taxable Canadian Property.
In the absence of such notification, a blanket 25-50% of the sale proceeds is withheld by default, and that amount must be remitted to the CRA within 30 days from the end of the month when the sale occurred; failure to comply with these requirement may result in the imposition of penalties and interest. A notification allows the CRA to assess and request payment of the withholding taxes based only on any gain generated, rather than the proceeds, allowing the taxpayer to receive more cash sooner, if the appropriate steps are taken as part of the notification process.
Unfortunately, the notification only factors in the gross proceeds and cost to calculate the gain, but does not consider any outlays and expenses associated with the disposition. In these cases, as well as other cases where elections are made, you would also need to subsequently file a tax return to report the sale of the property to receive a refund because of these selling costs or to ensure the elections are made on time and accepted by the CRA.
These compliance requirements are generally fulfilled when a disposition occurs, as it is often at the forefront of the taxpayer’s mind: the higher default withholding tax rate provides an incentive for taxpayers to ensure that the notification is provided so that the withholding is reduced.
However, an associated possible opportunity is often missed.
Consider a share in a corporation that is considered TCP. That share is subject to departure tax, as explained in Canada - Departure tax and reporting requirements when you leave Canada - BDO. Given that it is a TCP, the share would also be subject to the abovementioned compliance requirements. Assume the value of this share has decreased because of taxable dividends that have been paid out to the taxpayer shareholder while they were a non-resident of Canada, and that the taxpayer paid the applicable Part XIII taxes on those taxable dividends.
A unique opportunity may arise in such cases, when a capital loss arising on the disposition may be denied because of Canada’s tax rules. In such a case, if all the required conditions were met, the CRA may allow the taxpayer to adjust their prior departure tax return to claim a s119 tax credit.
There are numerous factors to consider to be eligible for the s119 credit, but there are also compliance requirements that must be met to be eligible for this opportunity.
Taxpayers should explore the possibility that there may be an opportunity to reclaim departure taxes when the value of the asset has decreased since the taxpayer’s departure because of dividends paid out to the taxpayer.
For more information on the tax implications of disposing of taxable Canadian property by non-residents, please consult your regular BDO contact or the author of this article.
Anita Wu
BDO in Canada
Compliance Requirements
When a non-resident of Canada disposes of TCP, the non-resident is required to notify the Canada Revenue Agency (CRA) within 10 days of the disposition to determine the amount of taxes payable on the disposition. This notification is generally done by filing Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, and when applicable, Form T2062A, Request by a Non-resident of Canada for a Certificate of Compliance Related to the Disposition of Canadian Resource or Timber Resource Property, Canadian Real Property (Other Than Capital Property), or Depreciable Taxable Canadian Property.In the absence of such notification, a blanket 25-50% of the sale proceeds is withheld by default, and that amount must be remitted to the CRA within 30 days from the end of the month when the sale occurred; failure to comply with these requirement may result in the imposition of penalties and interest. A notification allows the CRA to assess and request payment of the withholding taxes based only on any gain generated, rather than the proceeds, allowing the taxpayer to receive more cash sooner, if the appropriate steps are taken as part of the notification process.
Unfortunately, the notification only factors in the gross proceeds and cost to calculate the gain, but does not consider any outlays and expenses associated with the disposition. In these cases, as well as other cases where elections are made, you would also need to subsequently file a tax return to report the sale of the property to receive a refund because of these selling costs or to ensure the elections are made on time and accepted by the CRA.
These compliance requirements are generally fulfilled when a disposition occurs, as it is often at the forefront of the taxpayer’s mind: the higher default withholding tax rate provides an incentive for taxpayers to ensure that the notification is provided so that the withholding is reduced.
However, an associated possible opportunity is often missed.
Opportunity
Consider a share in a corporation that is considered TCP. That share is subject to departure tax, as explained in Canada - Departure tax and reporting requirements when you leave Canada - BDO. Given that it is a TCP, the share would also be subject to the abovementioned compliance requirements. Assume the value of this share has decreased because of taxable dividends that have been paid out to the taxpayer shareholder while they were a non-resident of Canada, and that the taxpayer paid the applicable Part XIII taxes on those taxable dividends.A unique opportunity may arise in such cases, when a capital loss arising on the disposition may be denied because of Canada’s tax rules. In such a case, if all the required conditions were met, the CRA may allow the taxpayer to adjust their prior departure tax return to claim a s119 tax credit.
BDO Insights
There are numerous factors to consider to be eligible for the s119 credit, but there are also compliance requirements that must be met to be eligible for this opportunity.Taxpayers should explore the possibility that there may be an opportunity to reclaim departure taxes when the value of the asset has decreased since the taxpayer’s departure because of dividends paid out to the taxpayer.
For more information on the tax implications of disposing of taxable Canadian property by non-residents, please consult your regular BDO contact or the author of this article.
Anita Wu
BDO in Canada