“Taxable Canadian Property” (TCP) is a term used in the Income Tax Act (ITA) to describe property, the capital gains on which even non-residents pay tax. TCP includes all real property (real estate) in Canada and, in the past, included shares of Canadian private corporations.
The definition of TCP was amended by the 2010 Federal Budget to exclude shares of private corporations (as well as interests in partnerships and trusts) that did not derive more than 50% of their value from any combination of real or immovable property situated in Canada, Canadian resource property and timber resource property at any point in the 60 months before the sale.
The new rules received Royal Assent in July and are intended to reduce the number of cases where a “section 116” certificate is required from the CRA by eliminating shares of many private companies from the definition of TCP. If a section 116 certificate is not obtained for TCP the purchaser is required to withhold 25% of the purchase price and remit it to the CRA.
However, even if withholding on the purchase price and a section 116 certificate are not required, other provisions of the ITA could apply. For example, section 212.1 of the ITA can deem an otherwise exempt Canadian capital gain to be a dividend, which is then subject to Canadian withholding tax rates that can range from 5% to 25%.
For example, suppose a US resident sells shares in a Canadian resident company (that is no longer TCP) to an associated non-arm’s length Canadian company. While the sale is now exempt from the section 116 certificate requirements, some or all of the sale proceeds may be deemed to be a dividend by section 212.1.
It is important to remember that relief from one provision of the ITA does not mean that other provisions will not still apply.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.