Sent: Monday, January 10, 2005 10:15 AM
Subject: RE: AUthority regazrding witholding
Counsel has asked me for the authority (Statutory citation) for the withholding of 50% of the sale price of depreciable property and 25% of the sale price of non-depreciable property Can you guide me on this one..
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david ingram replies
You need to read IC 72-17 R4
Information circular 72-17 R4 - 1992
PROCEDURES CONCERNING THE DISPOSITION OF TAXABLE CANADIAN PROPERTY BY NON-RESIDENTS OF CANADA -- SECTION 116
This circular cancels and replaces Information Circular No. 72-17R3 dated May 8, 1987.
Contents
a.. General information (1-3)
b.. Notification process (4-11)
c.. Appropriate forms (12-16)
d.. Technical applications (17-21)
e.. Real estate appraisals or business equity valuations (22-23)
f.. Tax treaty exemptions (24-28)
g.. Inventory of land (29)
h.. Section 85 elections (30-31)
i.. Security or payments on account of tax (32-38)
j.. Certificate of compliance (39-42)
k.. Purchaser's liability (43-52)
l.. Filing a tax return -- Refund of excess payment (53-57)
m.. Misallocated or lost payments (58-60)
n.. General comments (61-69)
General information
1. Under section 116 of the Income Tax Act (the Act), non-resident vendors (from now on referred to as vendors) who dispose of certain types of taxable Canadian property (see item 2 below), have to notify Revenue Canada , Taxation about the disposition either before they dispose of the property or after they dispose of it. In addition, before we at Revenue Canada, Taxation can issue a certificate of compliance to the vendor, we have to receive either an amount to cover the tax owing, or appropriate security for any gain the vendor may realize at the time the property is disposed of. We will credit any payments or security the vendor provides to the vendor's account, and make the final settlement of tax when we assess the vendor's income tax return for the year.
If the vendor does not comply with the section 116 requirements, which the vendor must do so before receiving the certificate of compliance, the purchaser of the property may deduct or withhold a specified amount from the proceeds of the disposition to cover any tax which the vendor owes.
2.
(a) The types of taxable Canadian property (referred to in item 1 above) are the types of property, or an interest therein, described in paragraph 115(1)(b) of the Act excluding subparagraphs 115(1)(b)(iv), (viii) and (ix). They may be described as follows:
(i) real property situated in Canada (mortgages and hypothecs are not considered to be an interest in real property);
(ii) other capital property used to carry on business (other than property used or held by an insurer to carry on an insurance business) in Canada;
(iii) capital property of an insurer that in the year is used or held by the insurer to carry on an insurance business in Canada;
(iv) shares of corporations that reside in Canada, other than public corporations;
(v) an interest in a partnership, if at any time during the 12 months immediately before the disposition, 50% or more of the fair market value of all the partnership property (including the amount of any money of the partnership on hand) consisted of:
A. property that would be "taxable Canadian property," as described in paragraph 115(1)(b) of the Act;
B. a Canadian resource property, as defined by paragraph 66(15)(c) of the Act;
C. a timber resource property as defined by paragraph 13(21)(d.1) of the Act; or
D. an income interest in a Canadian resident trust;
(vi) a capital interest in a Canadian resident trust (other than a unit trust); and
(vii) a unit of a Canadian resident unit trust (other than a mutual fund trust).
(b) Certain types of taxable Canadian property fall into the category of excluded property as defined in subsection 116(6) and, as such, are not subject to the requirements of section 116. The disposition of excluded properties by a non-resident person may result in tax payable under subsections 2(3) and 115(1). Excluded property consists of:
(i) property described in subparagraph 115(1)(b)(ix);
(ii) a share of capital stock of a public corporation, or an interest therein;
(iii) a unit of a mutual fund trust;
(iv) a bond, debenture, bill, note, mortgage, hypothec or similar obligation; and
(v) property prescribed by Regulation 810 to be excluded property.
(c) Regulation 810 excludes:
(i) property of a non-resident insurer that is a qualified insurance corporation;
(ii) an option on property referred to in (b) (i) to (iv) and (c)(i) and (ii) above, whether or not the property exists;
(iii) an interest in a property referred to in (b) (i), (iii), and (iv) and (c)(i) and (ii) above.
(d) Section 116 specifies that non-residents notify us when they dispose or propose to dispose of a life insurance policy in Canada, a Canadian resource property, or depreciable property that is or would be taxable Canadian property if they disposed of it. After February 20, 1990, property (other than capital property) that is real property situated in Canada, including any interest in or option on the property (whether or not such property exists) and a timber resource property or any interest in or option on the property, are also subject to the provisions of section 116.
3. Section 116 will apply when the vendor is a non-resident or considered to be a non-resident under the Act (e.g., subsection 250(5)). The purchaser's domicile or country of residence is not relevant in determining if section 116 applies. The purchaser may be either a Canadian resident or a non-resident. Section 116 applies at the time the disposition occurs. Thus, if a vendor is contemplating selling the property to which section 116 applies, and the vendor is a Canadian resident before the property is disposed of, but will be a non-resident when the property is finally disposed of, section 116 will apply.
Notification process
4. If a vendor chooses to submit a Notice of Proposed Disposition under section 116, the vendor should send the notice at least 30 days before the property is actually disposed of to give us enough time to review the transaction and verify that the vendor's payment or security is adequate. If possible, we will issue the certificate of compliance before the actual date the vendor disposes of the property. The vendor should send us the Notice of Actual Disposition, as required by subsection 116(3), by registered mail, not later than 10 days after the date the property was disposed of.
5. Because no forms have been prescribed for the purposes of notification by vendors under section 116, vendors may notify us by letter when they dispose of property. To review the disposition, we often need additional documentation to support the proceeds or proposed proceeds of disposition, real estate appraisals, business equity valuations or the calculations used to determine the adjusted cost base. The Department has available a series of T2062 forms which list the documentation or information we need for specific types of situations. If a vendor is notifying us by letter, we also need to see all the necessary documentation to support the gain reported along with the following information:
(a) the vendor's name and address;
(b) the complete name and address of the proposed or actual purchaser;
(c) a description that will enable the Minister to identify the property;
(d) the estimated or actual amount of the proceeds of disposition; and
(e) the vendor's adjusted cost base at the time the notice was filed.
To ensure that the payment is properly posted, it is important that the vendor clearly state in a letter that he or she is making a section 116 Notice of Disposition. In addition, the names of the vendor and purchaser must be indicated, along with the vendor's Canadian social insurance number, corporate account number or non-resident account number, if one is available.
6. If possible, vendors should use the appropriate T2062 forms to notify us about section 116 dispositions rather than reporting transactions by letter. The T2062 forms outline the procedures to follow for reporting the transaction, calculating the gain, the required payment on account of tax, and the information essential to enable us to issue the certificate as soon as possible. Using these forms reduces delays and often expedites the processing of the notice. Vendors can obtain the T2062 forms from any district office.
7. If the facts and amounts stated on the Notice of the Proposed Disposition agree with the facts and amounts of the actual disposition, the vendor does not have to send us a notice regarding the actual disposition.
8. We only require notice of the actual disposition (in accordance with subsection 116(3)) if the vendor did not file a Notice of a Proposed Disposition, or if the circumstances of the proposed disposition differ from those of the actual disposition. The vendor should send us the notice of the actual disposition, by registered mail, within 10 days from the day the transaction was completed, in accordance with subsection 116(3) of the Act.
Sometimes a vendor has to file a second notice. This occurs if the actual purchaser is a person other than the proposed purchaser, the actual proceeds of disposition are more than the estimated proceeds, or the actual adjusted cost base of the property immediately before the disposition is less than the reported adjusted cost base. As soon as we receive the second notice along with any required additional payment on account of tax or acceptable security, we will issue a certificate of compliance (Form T2068) in accordance with subsection 116(4) of the Act.
9. We need the vendor's Canadian social insurance number, corporate account number, or non-resident account number to ensure that any payment the vendor makes agrees with the information on the vendor's income tax return for the year.
10. When there is more than one vendor, each one must file a separate form indicating his or her interest in the property. For partnership dispositions, it is our policy to accept one Notice of Disposition filed on behalf of all partners. However, along with the notice, we need a complete listing of the non-resident partners who are disposing of the property together with their Canadian and foreign addresses, Canadian social insurance numbers, corporate account numbers or non-resident account numbers, how much each partner owns, and their portion of the payment or security. We will then issue one certificate of compliance and attach a list of the above information. The partnership is responsible for providing the relevant information to each affected partner. Each partner's tax liability will be determined when we assess each partner's income tax return for the year.
11. The vendor should complete the applicable form and send it with the required payment on account of tax or acceptable security to the district office serving the area in which the property is located. If the properties are located in several areas and more than one district office is affected, the vendor should send the notice to the district office that serves the area where the majority of the properties are located.
Appropriate forms
12. Vendors should use Form T2062 to notify us about an actual or proposed disposition of taxable Canadian property (other than depreciable property or excluded property) as described in item 2 above. If the property is not depreciable property (see item 14 below for definition of depreciable property) such as personal use property (e.g., a property in the country consisting of land, building, and equipment), vendors should send only one T2062 form. We will only issue one certificate of compliance.
13. Vendors should use Form T2062A to declare proposed or actual dispositions of properties identified in paragraph 2(d) above. Except as otherwise noted, the notification process for Form T2062A is outlined in items 4 to 11 above.
14. In some cases, vendors may have to file a T2062 form and a T2062A form for one disposition. When vendors dispose of depreciable taxable Canadian property, they should use a T2062 form to declare the gain or loss on the land and building. The recapture of capital cost allowance or terminal loss should be reported on Form T2062A.
Depreciable property is property for which a taxpayer is entitled to claim capital cost allowance, which is deductible when calculating income from business or property. A T2062 form and a T2062A form for depreciable property should be filed even if capital cost allowance has not been claimed. We will then issue two certificates of compliance.
15. Non-resident vendors should use Form T2062A Schedule 1 to determine the balances in the various "pools" and the payment on account of tax (if any) when they dispose of Canadian resource properties. To support the amounts reported, vendors should submit Form T2062A along with any other supporting documents. Vendors cannot use unrelated outlays and expenses and losses carried forward from previous years to reduce the balance in the "pools" and thus lower the amount subject to payment on account of tax.
16. Life insurance companies should use Form T2062B and Form T2062B Schedule 1 to report the disposition of life insurance policies in Canada on behalf of a vendor. In these instances, the insurer requests a letter of authorization from the vendor in order to establish an agency relationship. The insurer then submits a copy of this letter with Form T2062B and the appropriate payment on account of tax to the Department. After we have verified the payment, we will issue a certificate of compliance (Form T2068) to the insurer and the vendor.
Technical applications
17. A "disposition" for capital gains purposes is defined in paragraph 54(c) of the Income Tax Act as including "any transaction or event that entitles a taxpayer to proceeds of disposition of property." Therefore, the disposition of real property normally occurs at the time the deed, in properly executed form, is delivered to the purchaser. This is usually the closing date. If the disposition is in the form of a vendor's agreement for sale, then the disposition normally occurs when the properly executed agreement for sale is delivered to the person acquiring the property.
18. The term "proceeds of disposition" is defined in paragraph 54(h) of the Act.
19. If the disposition is not at arm's length, proceeds will be considered to be equal to fair market value in accordance with subsection 116(5.1), if the consideration is less than the fair market value.
20. The adjusted cost base reported on Forms T2062, T2062A, T2062B must be calculated in accordance with the relevant sections of the Income Tax Act and the Income Tax Application Rules. If we estimate that the adjusted cost base differs from the amount reported by the vendor, we may take the position that the vendor has not reported the information required, and we will then withhold the certificate until the vendor has given us the correct information.
21. The rules for determining whether a disposition of a life insurance policy in Canada has occurred, as well as the amount of the proceeds and the adjusted cost base are set out in section 148 of the Act.
Real estate appraisals or business equity valuations
22. To reduce delays, we may request copies of the vendor's financial statements for the previous year, as these are usually not readily available in the district offices. These statements will be used by the Department's Business Equity Valuation Units or Real Estate Appraisal Sections to review the taxpayer's reported values.
23.
(a) If we find that we must do a detailed real estate appraisal or business equity valuation, we will try to establish an "estimated value" on which any required payment on account of tax may be based. If the non-resident wishes to make the payment based on this "estimated value," we will issue the certificate of compliance to enable the taxpayer to complete the transaction without having to wait for the results of the appraisal or valuation, which usually takes several months.
(b) Once the business equity valuation or real estate appraisal has been completed, any changes in the values will be discussed with the vendor or the vendor's representative. The values established as a result of the appraisal or equity valuation should be used when the vendor files a return of income for the year in which the disposition occurs.
(c) If the valuation or appraisal is finalized in the vendor's favour before the income tax return for the year in which the disposition occurs may be filed, the vendor may request a refund of any excess payment on account of tax. The request must be made in writing to the district office that processed the section 116 notice.
Tax treaty exemptions
24. The Department allows vendors to claim an exemption under a specific tax treaty at the time they file the Notice of Disposition. Vendors must state the applicable Article (paragraph) of the particular treaty which Canada has with their country of residence.
To expedite the processing of the exemption, the necessary documentation to support the claim should be submitted along with the request. The documentation which is acceptable must be based on the particular tax treaty under which the exemption is claimed, such as proof of residency, or that the gain has or will be reported in the vendor's country. Tax officials, in some countries, will supply the necessary certification required to claim the exemption.
25. The United States Department of the Treasury, Internal Revenue Service will provide certification for corporations, exempt organizations and individuals. Requests for certification should be sent to the appropriate service centre. The Department of the Treasury, Publication 686, Certification for Reduced Tax Rates in Tax Treaty Countries, outlines the certification process.
26. We need at least 30 days to make the necessary determination. Section 116 does not provide for treaty exempt status. It is important that the vendors supply the necessary documentation to support their claim. If the Department and the vendor cannot agree as to whether the exemption of a particular tax convention applies, the vendor must provide the required payment or security before we can issue a certificate of compliance. A letter of undertaking is not considered acceptable security. Once the matter is resolved, the vendor may request a refund or release of security based on the final decision.
27. The granting of exemptions at the time of notification of disposition is departmental policy, and as such is discretionary. We will issue a certificate of compliance indicating that the disposition is treaty exempt. However, we will only issue the certificate of compliance, in this instance, if all other outstanding debts with the Department have been satisfied.
28. For the purpose of paragraph 9, Article XIII of the Canada-United States Income Tax Convention, the reduction of the capital gain for properties held since before January 1, 1972 and disposed of after December 31, 1984, is calculated by using a ratio based on the number of months in that period over the total number of months since January 1, 1972 to the date of disposition. This is so because capital gains in Canada became taxable after 1971, and it is reasonable to view the monthly accrual of such gains as only taking place after 1971.
The Median Rule described in ITAR 26(3) of the Act applies when calculating the gain, otherwise subject to tax, for the purposes of paragraph 9, Article XIII of the Convention.
If the vendor is an individual, ITAR 26(3) would be subject to any election made previously by that individual under ITAR 26(7) of the Act.
Inventory of land
29. Before February 20, 1990, inventory of land was excluded from section 116 requirements. For dispositions affected by this legislative revision, we have a discretionary exemption policy for certain vendors who operate a business involving inventory of land. To qualify, the vendor must satisfy the Department that:
(a) property transactions of this kind have been previously reported on income account; and/or
(b) the vendor is making regular instalment payments.
If at the time of filing the Notice of Disposition, the vendor and the Department disagree as to the nature of the transaction, i.e., whether proceeds are on account of income or capital, the request for exemption will be referred to the International Audit Section in the applicable district office. Before this submission, the vendor will have to supply any necessary supporting documentation or representation as to why the nature of the transaction should be in respect of capital rather than income.
If we are satisfied that the vendor meets the established criteria, and has no outstanding tax liabilities, we will issue a certificate of compliance stating "qualified business exemption."
Section 85 elections
30. If a vendor notifies us of a disposition that is subject to an election in respect of a transfer according to section 85 of the Act, we will not issue the requested certificate unless the prescribed section 85 election Form T2057 or Form T2058 has been submitted along with Form T2062 or Form T2062A.
31. In addition to submitting the completed Forms T2057 and T2058, the transferor and transferee must send all the information specified on these forms and provide supporting documentation, such as business equity valuations, real estate appraisals or calculations, showing how the reported values were determined.
Security or payments on account of tax
32. The objective of obtaining a payment on account of tax or security on the disposition of property, as described in item 2 above, is to protect the revenues of the Crown that are generated by taxes which may be exigible on the income and capital gains realized by vendors on these dispositions at the time a return of income for the year is assessed. Refer to item 38 below for procedures for providing security
33. The amount subject to a payment on account of tax under section 116 is the amount by which the estimated amount of proceeds of disposition exceeds the adjusted cost base at the time the notice of the proposed disposition is sent (paragraph 116(2)(a)), or the amount by which the actual proceeds of disposition exceeds the adjusted cost base immediately before the disposition (paragraph 116(4)(a)). Outlays and expenses to the extent that they were incurred for the purpose of making the disposition are not taken into account. These amounts are allowable when calculating the gain on the disposition to report on the income tax return for the year in which the disposition occurred.
34. For a certificate of compliance to be issued, the required payment on account of tax or security on the disposition or proposed disposition of property, as described in item 2(a) above, is a flat rate of 33 1/3% of the excess of the proceeds of disposition over the adjusted cost base of the property (i.e., 33 1/3% of the total capital gain). Form T2062 is the appropriate form to use to report these dispositions.
35. For a certificate of compliance to be issued under subsection 116(5.2), for either an actual or a proposed disposition, a payment on account of tax or security acceptable to the Minister must be provided. Refer to item 2(d) above for a description of the properties. The amount subject to a payment on account of tax from the disposition of the above types of property recognizes the fact that those amounts are fully included in income. Therefore, the non-resident federal tax rates must be used for individuals, and 38% for corporations, less the Federal Tax Abatement, plus the 3% corporation surtax, if the income generated is from a business. The Federal Tax Abatement does not apply to the recapture of capital cost allowance resulting from a disposition when the income is from property.
36. Non-resident federal tax rates for individuals can be found in the current issue of the General Tax Guide and Return for Non-Residents and Deemed Residents of Canada. Tables A and B, or Schedule 1, "Detailed Tax Calculation," included in the guide package should be used. The rates in this guide include the federal surtax, which must be considered in determining the payment on account of tax. A copy of this guide can be obtained from any district office, or from the International Taxation Office.
37. The Department's policy is as follows regarding payments on account of tax or security for the disposition of depreciable taxable Canadian property, and any resulting capital gains and recapture or terminal loss of capital cost allowance:
(a) when the correct amount subject to recapture of capital cost allowance can be determined, or if no capital cost allowance has ever been claimed, the required payment on account of tax is determined as follows:
(i) 33 1/3% of the total capital gain on the land and building. The amount determined should be reported on Form T2062;
(ii) the applicable individual or corporate non-resident federal tax rates, as referred to in items 35 and 36 above, must be applied to determine the payment on account of tax on the amount of recapture because this amount will be fully taxable when the vendor files a return of income for the year in which the disposition occurred. Recapture of capital cost allowance should be reported on Form T2062A.
(b) When the amount of recapture of capital cost allowance or terminal loss cannot be determined at the time of disposition or proposed disposition, or an agreement of the amount for the purposes of the notice cannot be reached with the Department, the required payment on account of tax is determined as follows:
(i) 33 1/3% of the total capital gain on the land and building. The amount determined should be reported on Form T2062;
(ii) the non-resident federal tax rates should be applied on the estimated recapture based on the assumption that the full capital cost allowance was claimed from the time of purchase to the date of disposition. Every attempt should be made to resolve the matter before filing an income tax return for the year the disposition occurred. This procedure will attempt to ensure that a sufficient payment is provided to cover any amount subject to recapture. The final settlement of tax will be made when the return of income, for the year in which the disposition occurs, is assessed. Form T2062A should be used for the notification.
This procedure will only be used after all efforts to determine the correct amount subject to recapture of capital cost allowance have been exhausted, and it is imperative that the certificate of compliance be issued. Income tax returns for previous years should be made available to support the recapture reported or the terminal loss claimed.
38. As an alternative to immediate payment of the tax, we may accept security for the tax as an interim arrangement. In such a case, the vendor should contact the Chief of Collections at the district office concerned, to negotiate the security that the Department is prepared to accept.
Certificate of compliance
39. We will issue the certificate of compliance at the earliest possible date once we have received and validated the necessary information, and have received acceptable payment or security.
40. We will issue a copy of the certificate of compliance to both the vendor and the purchaser. The certificate protects both the vendor and the purchaser from any further tax liability in respect of the particular notice filed for that particular disposition.
41. We will issue a (Form T2064) certificate of compliance for a proposed disposition in accordance with subsection 116(2) of the Act if the conditions of subsection 116(1) are met, and the required payment on account of tax or acceptable security is provided.
42. We will issue a certificate of compliance (Form T2064 or Form T2068 for proposed or actual dispositions respectively) in accordance with subsection 116(5.2) of the Act, provided that the vendor has paid any required amount on account of tax, or provided acceptable security for the properties described in item 2(d) above.
Purchaser's liability
43. If the vendor does not comply with the requirements of subsections 116(2) and 116(4), the purchaser may become liable under subsection 116(5) to pay a specified amount of tax on behalf of the vendor. The purchaser is then entitled to withhold a specified amount of tax from the proceeds of disposition. The required amount must be remitted to the Receiver General 30 days after the end of the month in which the property was acquired.
The purchaser is liable, and is entitled to withhold and remit 33 1/3% for dispositions occurring after 1989 of either:
(a) the cost of the property acquired by the purchaser; or
(b) if a certificate has been issued, the amount by which the cost of the property acquired by the purchaser exceeds the certificate limit fixed by a proposed disposition.
Note: For dispositions occurring after April 27,1989 and before 1990, the rate is 30%.
Purchaser liability assessments are not subject to any time restrictions. Therefore, we may issue an assessment at any time we become aware that section 116 has not been adhered to.
44. The circumstances under which a purchaser may become liable are:
(a) when we do not issue a certificate of compliance (Form T2064 or Form T2068) under either subsection 116(2) or 116(4) of the Act, for a proposed or actual disposition of taxable Canadian property; or
(b) when we issue a certificate of compliance for a proposed disposition under subsection 116(2) of the Act, and the cost to the purchaser of the property is more than the amount specified in the certificate of compliance Form T2064 (the estimated proceeds of disposition), and the vendor did not notify the Department or did not comply with the requirements under subsections 116(3) and 116(4) of the Act. Refer to item 8 above.
45. Once we have issued a certificate of compliance under subsection 116(4) of the Act, the purchaser does not have to pay tax in respect of the particular disposition for which the particular certificate of compliance was issued.
46. For dispositions of properties described in item 2(d) above, the purchaser is entitled to withhold and remit, and may become liable under the provisions of subsection 116(5.3) of the Act to pay to the Department, on behalf of the vendor, an amount equal to 50% of the amount by which the purchase price of the property exceeds the amount fixed in the certificate of compliance, if any, issued under subsection 116(5.2). The required amount must be sent to the Receiver General 30 days after the end of the month in which the property was acquired.
47. The purchaser's liability for tax under subsection 116(5) or 116(5.3) does not extend to a mortgagee who acquired a property by foreclosure, unless the transactions of mortgage and foreclosure were used as a device to sell the property. When the mortgagee is not liable under section 116 to pay tax, and we receive a request to do so, we will issue a letter to that effect.
48. If a mortgagee exercises a power of sale based on the terms of the mortgage rather than foreclosing, title to the property passes directly from the mortgagor to a third party purchaser. Thus the provisions of subsections 116(5) or (5.3) of the Act apply when a property is sold pursuant to a power of sale, and the vendor (mortgagee) must comply with section 116.
49. Any tax remittances payable by the purchaser are due within 30 days after the end of the month in which the property was acquired. The purchaser should give particulars of the transaction, identify the remittances, and specify that the payment concerned pertains to subsections 116(5) or 116(5.3) of the Income Tax Act. The full name and address of the vendor and the purchaser should be indicated.
50. Any purchaser who fails to remit or pay an amount required under subsections 116(5) or (5.3) may be assessed a penalty under the authority of subsection 227(10.1), calculated under the provisions of subsection 227(9). Subsection 227(9) provides for a penalty of 10% of the amount required for the first failure and a 20% penalty for second and subsequent failures. Subsection 227(9.3) provides for the levying of interest on the payment or remittance required by subsections 116(5) or (5.3).
51. For penalty and interest in respect of the 1985 and following taxation years, the Minister has the discretion to waive or cancel all or any portion of any penalty or interest if it is found that the penalty or interest resulted from circumstances beyond the control of the purchaser.
52. The purchaser incurs no obligation to pay tax if, after reasonable inquiry, there was no reason to believe the vendor was a non-resident of Canada. There is a question as to what constitutes "reasonable inquiry." Our position is that the purchaser must take prudent measures to confirm the vendor's residence status. We will review each case on an individual basis whenever a purchaser assessment is being considered. The purchaser may become liable if, for any reason, we believe the purchaser could have or should have known that the vendor was a non-resident. We will not make inquiries on behalf of a purchaser in this regard.
Filing a tax return -- Refund of excess payment
53. The final settlement of tax on the disposition of properties is made when the vendor's income tax return is assessed. The return should be filed for the taxation year in which the disposition took place. After the return is filed, any excess payment is refunded or provision is made for the release of security once the established debt has been satisfied.
54. For individuals, the income tax return is due on April 30 of the year following the year in which the disposition occurred. For corporations, the return is due six months after the end of the taxation year in which the disposition took place. Trust returns are due 90 days after the end of the trust's taxation year in which the disposition took place. Returns that are filed late are subject to interest and applicable penalties. Copies of the income tax returns and the related guides can be obtained from any district office. Individuals should request the income tax return for "non-residents and deemed residents."
55. These returns must be filed at the:
International Taxation Office
875 Heron Road
Ottawa, Canada
K1A 1A8
Any questions concerning the assessment of the return should also be sent to this address.
56. Delays in processing a vendor's income tax return occur for many reasons. However, if the proper information is provided at the time of filing, the return will be processed as quickly as possible.
Vendors should ensure that:
(a) the information area is completed in detail,
(b) their Canadian social insurance number, corporate account number or non-resident account number is entered as requested;
(c) the tear-off information slip attached to the certificate of compliance should be enclosed. This information slip is invaluable in tracing payments, security or exemptions in respect of the disposition. This is particularly important for non-residents who do not have the identification in (ii) above; and
(d) if, for any reason, circumstances have changed and the amount reported on the vendor's income tax return differs substantially from the amount reported for the disposition, a note should be attached to the income tax return along with the appropriate documentation. This will greatly reduce any delays.
57. For the 1985 and following years, the Minister has the discretion to assess the individual returns and testamentary trust returns that are filed more than three years after the end of the taxation year in which the disposition occurred in order to issue refunds or to reduce taxes payable. This discretion may be exercised where the request is in writing and the Minister is satisfied that the refund would have been issued or tax payable reduced had the returns been filed on time.
Misallocated or lost payments
58. We make every effort to ensure that a payment made for a section 116 disposition is matched to the income tax return filed. Since many non-residents do not have account numbers, this is often difficult. If vendors follow the instructions for filing income tax returns in items 53 to 57 above, this problem will be alleviated.
59. If vendors are not credited with the proper amount, they should contact:
Non-Resident Correspondence
T1 Revenue Accounting
1nternational Taxation Office
Ottawa, Canada
K1A 1A8
Vendors should also provide the following information:
(a) a brief description of the disposition;
(b) the date of the payment;
(c) the district office that processed the notice; and
(d) a photocopy of the front and back of the cancelled cheque. This is most important.
60. Multiple-member partnerships are particularly subject to misallocation of a single payment made on behalf of the many partners. We will issue one certificate of compliance with a list of all non-resident partners, their addresses as provided, their Canadian social insurance numbers, corporate account numbers, or non-resident account numbers, and if no account identification is available, we will provide a number in the S/L XXX format. It is imperative that each member of the partnership receive the relevant information to ensure the efficient processing of his or her income tax returns. It is important to note that the assignment of the S/L number is temporary until such time as the applicable return is assessed. All assessed returns are assigned an account number that should be used in all future dealings with the Department. For more information concerning partnerships refer to item 10 above.
General comments
61. Section 116 does not apply to a deemed disposition on death under subsection 70(5). However, the executor acting on behalf of a non-resident decedent must file an income tax return for the year of death, and pay any tax that may be necessary on the deemed disposition.
62. Section 116 does not apply to property that is transferred or distributed on or after death and as a consequence thereof.
63. If compensation is received for damages to property, consideration must be given as to whether any part of the compensation involves a transfer of title or an interest therein to which section 116 would apply. It is unlikely that a transfer of title or an interest therein has taken place when compensation has been paid to the owner of real estate for damages claimed in a tort action. However, when such a payment is made according to a contractual arrangement between the parties, the terms of the contract should be examined to determine whether title or an interest in the real property has been received in exchange for the compensation.
64. Our position regarding amalgamations and section 116 of the Act is discussed in the relevant paragraph of Interpretation Bulletin IT-474R. This bulletin states that the section 116 procedures do not have to be complied with for the deemed disposition of shares on an amalgamation to which subsection 87(4) of the Act applies.
65. Sections 116 and 212(2) both apply to levy a withholding tax in those cases when a non-resident disposes of shares of a Canadian corporation in a non-arm's length transaction. The amount subject to withholding tax under subsection 212(2) is calculated in accordance with section 212.1. To eliminate double taxation, the Department will accept a calculation of proceeds of disposition of the shares, for purposes of section 116, which includes a reduction for the section 212.1 deemed dividend.
Vendors should submit a letter of explanation and a copy of the section 212.1 calculation along with Form T2062, when requesting a certificate of compliance in these cases.
66. Under the Doctrine of Sovereign Immunity, the Government of Canada may grant exemption from tax on certain Canadian-source investment income paid or credited to the government of a foreign country. Capital gains on the disposition of taxable Canadian property may be eligible for this exemption, subject to the conditions described in the relevant paragraph of Information Circular 77-16R3. When the vendor of taxable Canadian property is a foreign government, we may give the purchaser, upon request, written authorization not to pay tax in accordance with subsection 116(5) as long as we have substantiated that the property is, in fact, whollyowned by that government. The request should be sent to:
Revenue Canada, Taxation
875 Heron Road
Ottawa, Ontario
K1A 0L8
Attention: Provincial and International
Relations Division
67. The disposition of mineral rights in Canada is considered to be a disposition of a Canadian resource property, and as such, is subject to the requirements of subsection 116(5.2). In the case of a delay rental agreement, the bonus portion (bonus consideration) is subject to the provisions of subsection 116(5.2). The annual delay rental is subject to withholding tax under paragraph 212(1)(d) of the Act.
68. The disposition of a principal residence by a non-resident owner may be exempt from tax by virtue of paragraphs 40(2)(b) or (c) of the Act. When the gain on a principal residence is either partially or entirely exempt by these paragraphs, the non-resident should submit a Notice of Disposition (Form T2062) with a letter attached outlining the calculation of the expected amount of any capital gain on the disposition. A payment or security must be provided for the non-exempt portion before we can issue the certificate of compliance indicating the "principal residence exemption (amount) and principal residence non-exempt portion (amount)." If the entire gain is exempt, we will issue a certificate of compliance indicating "principal residence -- exempt."
69. Section 115.1 allows a non-resident person or partnership (vendor) and a purchaser to jointly elect, subject to the Minister's approval, to defer taxation of a gain or income according to a prescribed tax treaty, by filing the prescribed election T2024 form. These dispositions may also be subject to the provisions of section 116. In these instances, the T2024 form should be filed along with the applicable Notice of Disposition Form T2062, Form T2062A, or both, at the district office serving the area where the property is located. The requirement for security or payment on account of tax may be waived when a non-resident's request for relief under a treaty provision has been accepted by the Canadian competent authority.
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