Why should a Canadian resident care about “non-resident tax issues”?
Here are a few reasons:
1. If a person purchases “taxable Canadian property” (the most relevant example of which is real property situated in Canada) from a non-resident of Canada, the purchaser is required to withhold 25% of the entire purchase price and remit it directly to the CRA (within 30 days after the end of the month in which the purchaser acquired the property), unless (among other exceptions) the non-resident vendor has obtained a “116 certificate”, which may reduce (or eliminate) the amount of required withholding (see section 116 of the Income Tax Act (the “ITA”)). Conceptually, this “Section 116 Mechanism” is designed to protect the Canadian government’s ability to collect tax from a non-resident on capital gains realized in respect of property in Canada, since Canada has no direct jurisdiction over the non-resident vendor. A purchaser should be very careful to properly adhere to section 116, otherwise, he or she can face personal liability for up to 25% of the entire purchase price for the property.
2. If a person is the executor of an estate, or a trustee of a trust, which makes certain distributions to a non-resident beneficiary of the estate or trust, the executor or trustee is required, generally speaking, to withhold certain amounts on account of withholding tax under Part XIII of the ITA (“Part XIII Tax”). For example, if an estate or trust allocates “income” to a non-resident beneficiary, the estate or trust is required to withhold 25% of such income and remit it to the CRA on account of the Part XIII Tax liability (see paragraph 212(1)(c) of the ITA). Also, subsection 212(11) of the ITA generally deems payments out of an estate or trust that would not otherwise be considered “income”, to be income. For example, where an estate or trust transfers shares of a private corporation consisting of an inherent capital gain (i.e., the value of the shares of the company have increased beyond their “adjust cost base”) to a non-resident, a capital gain will be triggered (although a similar transfer to a resident of Canada may occur on a “rollover” basis resulting in no tax consequence). Although this amount is considered to be a capital gain (assuming that the shares are held as capital property), such amount is considered to be “income” for the purposes of Part XIII of the ITA (per 212(11)), and subject to 25% withholding tax. In other words, where an estate or trust transfers property with an inherent capital gain to a non-resident, the taxable portion of the gain will be subject to Part XIII Tax of 25%. This is the case even though no money/proceeds have been received by the estate/trust or the beneficiary.
Note that Part XIII Tax may be reduced to 15% (or less) pursuant to tax treaties that Canada has with other countries. For example, in the above described scenario involving the transfer of shares, if the non-resident beneficiary is a resident of the United States, the Part XIII Tax liability is reduced to 15% under Article XXII:2 of the Canada-U.S. tax treaty. Finally, and perhaps most importantly on this point, an executor or trustee may be responsible for any withholding taxes not remitted (plus interest and penalties) (be careful!).
3. Where the assets of an estate or trust have consisted – anytime in the five years leading up to a distribution – more than 50% of real property situated in Canada, the estate or trust is itself considered to be “taxable Canadian property”. The significance of this is that, generally speaking, where such an estate or trust makes any distribution to a non-resident beneficiary – even one that results in no tax liability, such as a straight distribution of cash – a 116 certificate is required, because the beneficiary is considered to have disposed of part of his/her interest in the estate or trust, which is itself “taxable Canadian property”. Accordingly, as in #1 above, a 116 certificate would be required.
4. If a person is a director of a corporation which makes any payments to a non-resident person (such as a dividend to a non-resident shareholder), the director can be personally liable for withholding taxes not remitted (plus interest and penalties) (section 227.1 of the ITA).
5. A partnership that has even one non-resident partner is not considered a “Canadian partnership”. This can have major ramifications for a non-Canadian partnership which, for example, holds real estate investments.
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