Why should a Canadian resident care about “non-resident tax issues”?

Here are a few reasons:

Withholding Requirements and Section 116 Certificates

When purchasing “taxable Canadian property” (such as real estate) from a non-resident, you must withhold 25% of the total purchase price. You must then remit this amount to the CRA within 30 days of the month the sale closed. However, a non-resident vendor can reduce or eliminate this holding by obtaining a “116 certificate” under the Income Tax Act. 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.

Estate and Trust Distributions to Non-Residents

Executors of estates and trustees of trusts often face unique obligations when distributing assets to non-resident beneficiaries. Generally, you must withhold tax under Part XIII of the ITA (“Part XIII Tax”) on these distributions.

For example, if a trust allocates “income” to a non-resident, the trust must withhold 25% of that amount. You must then remit this to the CRA to cover the Part XIII Tax liability. Note that subsection 212(11) of the ITA often deems payments as “income,” even if they wouldn’t normally be classified that way.

This rule also applies to private corporation shares. If a trust transfers shares with an inherent capital gain to a non-resident, this triggers a capital gain. While transfers to Canadian residents might occur on a tax-free “rollover” basis, transfers to non-residents do not. Under Section 212(11), the law treats this gain as “income” subject to the 25% withholding tax. Essentially, the taxable portion of the gain incurs a 25% Part XIII Tax. This applies even if the estate, trust, or beneficiary has not received any actual cash.

Tax treaties between Canada and other countries may reduce Part XIII Tax to 15% or less. For instance, the Canada-US tax treaty reduces the liability to 15% under Article XXII:2 if the beneficiary resides in the United States. Finally, executors and trustees must exercise extreme caution. You are personally responsible for any unremitted withholding taxes, plus interest and penalties.

Compliance for Estates Holding Canadian Real Property

Specific rules apply if more than 50% of an estate or trust’s assets consisted of Canadian real property at any time in the five years before a distribution. In this case, the law considers the estate or trust itself to be “taxable Canadian property.”

This classification is significant for all distributions to non-resident beneficiaries. You must obtain a Section 116 certificate even for cash distributions that result in no tax liability. The law views the beneficiary as having disposed of part of their interest in the estate or trust. Because that interest is “taxable Canadian property,” a Section 116 certificate is mandatory, just as described in the first point above. Accordingly, as in #1 above, a 116 certificate would be required.

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).

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.