DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Archive for the ‘Non-residents’ Category

Sold your House? Make Sure You Report It!

In Canadian Income Tax, Estates and trusts, Non-residents, Personal Tax, Principal Residence on November 18, 2016 at 8:31 pm

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If you have sold your home recently, you should take note of the new reporting rules announced by the CRA regarding the principal residence exemption (“PRE”).

The PRE applies on a pro-rata basis based on the number of years you are claiming the house as your principal residence. Form T2091 is technically required to report and claim the PRE on the sale. If you were claiming the exemption for the full period of ownership, then the gain on the sale is fully exempt from tax. The CRA’s policy until now has been that no reporting was required in such a case.

However, for 2016 and future years, this administrative policy has changed. Form T2091 is still not required if the full exemption is claimed, However, the sale must be reported on Schedule 3 of your tax return for the year. You will need to report a description of the property,  the year of acquisition and  the proceeds of disposition. Failure to report the sale will result in the denial of the PRE. However, you may go back and amend your return to report the sale and claim the exemption, subject to possible penalties of $100 per month to a maximum of $8,000.

For Quebec tax reporting, there has never been any administrative policy regarding a fully exempt sale of a principal residence and form TP-274 continues to be required.

Changes for Trusts

If your principal residence is owned by a trust, new rules will apply to you. I outlined the current rules in a previous post.

Under the new rules, only certain specialized trusts are now eligible to claim the PRE. They are alter-ego trusts, certain spousal or common law partner trusts, certain protective trusts or certain qualified disability trusts.

Starting in 2017, any trust that owns a home and does not fit within any of the categories above, will no longer be eligible for the PRE on the sale of the home. Therefore, if the house is sold before the end of 2016, the PRE can still be claimed.

For 2017 and later years, a home that was owned by a trust that no longer qualifies for the PRE will be allowed to calculate the exemption based on transitional rules that would require a valuation of the property as at the end of 2016. The PRE will be available for the “notional” gain up to the end of 2016, while the future growth in value will be subject to capital gains tax.

Anyone who currently lives in a home owned by a personal trust should consult their tax advisor.

Changes for Non-Residents

New rules will also apply to anyone who was a non-resident at the time they purchased a residential property in Canada. Under the current rules, the pro-rata formula that is used to calculate the PRE allows for an extra year (the plus 1 rule) in calculating the exemption. This generally allows for the fact that in a year where someone sells their home, they may own two properties, both of which should qualify for the exemption.

For a non-resident, the plus 1 rule allowed them to claim a portion of their gain as exempt, even though they never qualified since they were non-residents of Canada. Accordingly, for all sales on or after October 3, 2016, the Plus 1 rule will no longer be available to any taxpayer who was a non-resident of Canada in during the year in which he or she acquired the property. There are no transitional rules to this provision.

What’s Your Tax Issue? Withholding on Interest

In Canadian Income Tax, Non-residents on May 17, 2011 at 5:34 pm

The Tax Issue:

I’m a Canadian real estate investor. My mortgage is up for renewal and I have a friend who is not a Canadian resident (lives outside of Canada) who’s going to fund the mortgage payment. I’m going to pay him interest on an annual basis. I’m keeping the money for 5 years but I may be selling the current property that I’m holding now within a year. At which point I will reinvest that money in another property. What are the withholding tax rules that apply?

The Answer:

Well, you’re in luck, because I just got back from the UK, and I’ve been suffering from jet lag for the last week, so I haven’t had the energy to post for a while, but your question is a quick one, so I thought I’d quickly answer.

The answer is, most likely, there will no withholding tax. In 2008 withholding tax on interest paid to any arm’s-length non-resident was eliminated. Assuming your friend is not related to you, and that he is charging you a fair interest rate, the relationship should be considered at arm’s length, and no withholding will apply.

Even if the relationship is deemed to not at arm’s length, if your friend is a U.S. resident, the Canada-U.S. Treaty will kick in, and again, no withholding will apply since it was phased out completely as of 2010.

So, generally, the only way you may have a withholding obligation for interest is if it is paid to a person with whom you do not deal at arm’s length and who does not reside in the U.S. In such cases, the withholding rate is 25%, but could be reduced by a Treaty with Canada.

What’s Your Tax Issue?

In Canadian Income Tax, Non-residents, Personal Tax, Principal Residence on March 15, 2011 at 4:10 pm

Tax season is upon us, and here at The Tax Issue, the questions are streaming in at a furious pace. I had a few free minutes this afternoon, so I thought I’d tackle some of the backlog.

The Tax Issue:

My partner and I each have holding companies that have joint ownership of our operating company.  If we wanted to sell a 1/3rd share in the operating company is there a mechanism to utilize our personal capital gains exemption?

The Answer:

The capital gains exemption is a $750,000 lifetime limit available to all Canadian resident individuals. It can be used to shelter capital gains on the sale of either qualified farm property or qualified shares of a small business corporation.

Since the shares of your operating company are held through a holding company, the exemption would not be available in the situation you describe. Your holding company would be the vendor of the shares and the exemption is available to individuals only.

Having said that, there may be some “reorganization” of shares you could perform to get you into a better position. Such planning would go beyond what I could explain here, so I would explore these options with a tax professional.

The Tax Issue:

I am a Canadian living/working in the US and considered non-resident of Canada for tax purposes. I do have a rental property in Canada and looking for an easy way to file my income tax on the rental property. What I have read so far makes me believe that I must file my taxes through an agent in Canada. I am wondering if I can file my taxes without using an agent and what is the process to do that.

The Answer:

The short answer is that you do not need to file a tax return through an agent.

Since you are a non-resident of Canada, the Canadian person who pays you rent must withhold taxes and remit them to the CRA on a regular basis. This person could be your tenant directly, or a Canadian agent who manages the property and collects rent on your behalf. Either way, there has to be a Canadian responsible for withholding and remitting these taxes.

You then have the option of filing a tax return under section 216 of the Income Tax Act. The taxes previously withheld would be treated as a credit against your taxes payable. There are two options for withholding and filing under section 216. I have discussed this mechanism in a previous post. Check it out. Also, the CRA has an extensive section on their web site dealing with the issue.

The Tax Issue:

My mother passed away in 1995 and my father gifted her 50% portion of a house to me, however kept himself on title for the other 50%.   He had another house that he resided in.   He kept his name on solely to protect my interest in case of divorce.    He passed away in May 2010 and now I’m told that I may have to pay capital gains.   I don’t understand why I have to pay capital gains if I’m not selling the property and the property has been my principal residence.   He had nothing to do with the house.   Is there anything I can do to avoid paying this capital gains tax?

The Answer:

Unfortunately, it sounds like your father was the owner of more than one principal residence. Upon the death of an individual, he is deemed to have disposed of all his capital property at fair market value. That includes any real estate he owned. There is an exemption for a principal residence. The definition of “principal residence” includes, not only the house he lived in, but can also include a house occupied by his child. The downside is that his estate can only claim one property as a principal residence.

Your father’s executor will have to determine which of the properties he should claim as his principal residence in order to minimize the taxes on his death. I would call in the help of a good tax accountant to crunch those numbers.

2010 Budget Tax Trap

In Canadian Income Tax, Non-residents, Residency on January 20, 2011 at 1:21 pm

If you are a emigrating from Canada and own shares of a private company , beware of a new tax trap that awaits you.

Generally, when a Canadian become a non-resident, he is deemed to have disposed of all capital property (with certain exceptions) at fair market value. Shares of private companies are therefore subject to capital gains tax.

There are a number of rules in place to ease the transition, and avoid double-taxation when, for example, these shares are finally sold or liquidated after emigration.

One such rule is contained in section 119 of the Income Tax Act. In essence, where shares of a private company have been taxed on emigration, a credit against that tax is allowed for any further withholding taxes paid on dividends coming from that company. The credit applies when the shares are finally disposed of.

Let’s look at a simple example. In year 1, a Canadian owning shares of his holding company moves to the U.S. The only asset in the company is $100,000 cash, and his shares have a nominal cost base. Upon emigration, therefore, the shares will be subject to capital gains tax at a rate of 25%. The taxpayer pays $25,000 to the CRA.

In year 2, the company pays a $100,000 dividend to its shareholder and is then dissolved. The dividend is subject to a 15% non-resident withholding tax in Canada. The taxpayer pays $15,000 to the CRA.

As you can see, the taxpayer has now paid the CRA twice on the same $100,000, first in capital gains tax on emigration and again upon paying himself the cash.

In order to alleviate this problem, section 119 was put in place when the emigration rules were first introduced. It essentially allows a credit for the $15,000 withholding tax so all that is ultimately paid is the $25,000 capital gains tax.

Since the March 2010 federal budget, things have changed. Section 119 is available only for shares that are “taxable Canadian property”, which no longer includes private company shares in most cases.

While the elimination of most private company shares as taxable Canadian property will be a relief for many non-resident shareholders, it creates a trap for emigrating Canadian shareholders.

Now that private company shares are not taxable Canadian property, there is no credit available under section 119 and the value of a private company’s assets, as in the above example, could be subject to two incidences of tax.

A taxpayer who has already left Canada, paid capital gains tax and may have already paid dividends subject to 15% withholding tax with the intention of availing themselves of section 119 in the future is protected by grandfathering rules which provide that if you emigrated prior to March 5, 2010, any taxable Canadian property you owned at that time will remain as such after the change.

Clearly, this places an unfair burden on Canadians leaving Canada; however, the Department of Finance does not agree. They are aware of the issue and they stand by the change as a matter of policy (for now). I am just not quite sure what the policy is that intentionally creates a double-tax trap for unwary Canadian taxpayers.

The Twelve Points of the CRA

In Canadian Income Tax, Non-residents on December 15, 2010 at 4:32 pm

The twelve days of Christmas are soon upon us, so, I thought it would be nice if  The Tax Issue contributed to the holiday cheer by reproducing for you, the CRA’s twelve indicators to determine where a business is carried on for Canadian tax purposes. I’ll spare you any musical accompaniment. 🙂

One of the basic tenets of Canadian tax law is that any non-resident carrying on business in Canada is subject to tax in Canada. This criterion is similarly relevant in determining whether you are required to collect GST/HST.

So, what does it mean to be “carrying on business in Canada”? There is no clear definition in the legislation, so we must look to the jurisprudence and the CRA’s guidelines.

In 2002, the CRA issued a comprehensive policy statement with regard to whether a business is being carried on in Canada. This policy takes into account the jurisprudence, as well as other factors such as the global economy. The CRA has established a list of twelve factors that determine where a business is carried on for Canadian tax purposes. You can read one per day during the holidays, set them to music, or read them all at once. Just remember, once they’re gone, they won’t be back till next year! 🙂

1.      The place where agents and employees of the non-resident are located;

2.      The place of delivery;

3.      The place of payment;

4.      The place where purchases are made or assets acquired;

5.      The place from which transactions are solicited;

6.      The location of assets or an inventory of goods;

7.      The place where business contracts are made;

8.      The location of a bank account;

9.      The place where a non-resident’s name and business are listed in a directory;

10.  The location of a branch or office;

11.  The place where the service is performed; and

12.  The place of manufacture or production

Death of a Non-Resident RRSP Annuitant

In Canadian Income Tax, Non-residents on November 18, 2010 at 3:21 pm

OK everyone, this post gets a little technical, so I’m adding footnotes for the first time ever. If the Income Tax Act (ITA) frightens you, don’t read on.

My good friend and colleague (let’s call him “Shya”) came to me recently with an interesting problem. In 2007, his client, a former resident of Canada, died with a balance remaining in his Canadian RRSP account. At the time, the RRSP funds were transferred to the RRSP of his wife, also a non-resident of Canada. Under the normal rules for Canadian residents, the surviving spouse would simply report the “refund of premiums” on her 2007 tax return, and claim a corresponding deduction[1] for amounts deposited into her RRSP. No tax would have applied.

Unfortunately, the administrator of the RRSP was not on top of the situation. Had they realized that the taxpayers were non-residents of Canada, they would have known that a 25% withholding tax[2] applies to an RRSP that is paid to any non-resident. Further, since the amount was transferred directly to the spouse’s RRSP, filing a prescribed form upon the transfer of funds would have exempted the non-resident spouse from the withholding tax[3].

Unfortunately, the proper form was not filed, and no tax was withheld at the time of death.

Along comes the CRA two years later. Realizing what has happened, the CRA assessed the surviving spouse for the 25% withholding tax. Since the transfer to her RRSP was not done “pursuant to an authorization in prescribed form” as the law states, no exemption from this tax can apply.

Is the taxpayer out of luck? Perhaps.

Let’s go back in time once more. Had the taxpayer discovered this oversight in time, she still could have filed a special Canadian tax return under section 217 of the ITA[4]. The section 217 return is designed to give non-resident taxpayers the option of paying tax at the normal Canadian tax rates as opposed to the flat 25%. For many taxpayers the 217 election is not advantageous, because the Canadian tax rate that applies is based on a complex calculation that takes world income into account. For a non-resident with any substantial amount of total income, the rate usually will exceed 25%.

For our surviving spouse, however, the section 217 election would have resulted in no tax, since she would be allowed to take a deduction under the normal Canadian rules for the amount transferred to her RRSP. This would bring her net Canadian taxable income down to zero, and she could claim a refund of the 25% withholding tax.

There’s just one problem left for Shya’s client. The section 217 return must be filed within six months from the end of the taxation year that income was received. In this case, that would have been June 30, 2008. Since the problem didn’t come to light until the CRA’s assessment in 2009, the taxpayer is not entitled to file the election.

Now, the taxpayer’s only hope is to request that the CRA extend the time and allow her to file a late section 217 return. The CRA has the power at any time to extend the time for filing any return[5]. However, this administrative concession is not given lightly.

The issue has been dealt with in the past with respect to returns under section 216 of the ITA. The CRA has a published policy to give taxpayers “one opportunity” to file a late return where they have neglected to do so through ignorance or inadvertence. Perhaps this concession could be extended to section 217 returns.

If not, the CRA has issued guidelines[6] which presumably could apply in this scenario. In essence, the taxpayer would have to convince the CRA that there were extraordinary circumstances beyond her control (other than ignorance of the law) that prevented her from filing the return on time.

The moral of the story? Always consult a tax professional when dealing with unusual transactions involving non-resident taxpayers.


[1] ITA 60(1)(l)

[2] ITA 212(1)(l)

[3] ITA 212(1)(l)(i)

[4] ITA 217

[5] ITA 220(3)

What’s Your Tax Issue? – Taxable Quebec Property

In Canadian Income Tax, Non-residents on September 21, 2010 at 9:32 am

The Tax Issue:

If I were to be a Canadian non-resident living in the Caribbean and I have rental property in Quebec, besides filing a federal tax return for Electing under Section 216, do I have to file anything for Quebec?

The Answer:

Part XIII of the Canadian Income Tax Act provides for a 25% withholding tax on rents paid to non-residents. As explained in an earlier post, an election under section 216 can be made whereby the non-resident pays tax under Part I, effectively replacing the 25% withholding tax with the normal income tax on rental income, net of expenses.

Quebec, which collects and administers its own income tax, does not levy withholding tax on rents paid to non-residents. Therefore, no Quebec tax return is required during the time you own the property and collect rents.

However, property situated in Quebec is considered to be “Taxable Quebec Property”, and is subject to withholding tax upon the sale of the property. Similar to the rules under section 116 of the Canadian law, the Quebec Taxation Act (Section 1097) provides for a 12.875% withholding tax on gains derived from property situated in Quebec. If a clearance certificate is not obtained (Form TP-1097), the 12.875% is levied on the full sale price.

In the year of sale, you will have to file both federal and Quebec income tax returns in order to report the sale and (possibly) recover a portion of the withholding tax.

What’s You Tax Issue? Non-Resident Providing Services

In Canadian Income Tax, Non-residents on August 23, 2010 at 9:30 am

The Tax Issue:

Can a Canadian Corporation employ a non-resident (Swedish citizen) on its Canadian payroll, directly, take off withholdings etc. This individual resides in Sweden, works with us from there and visits twice yearly for a month at a time. If we can do that, it is beneficial for him as paying his consulting company in Sweden is even more onerous for him.

The Answer:

It is up to you to decide to enter into a contract with a consulting company or with an individual personally. I can’t comment on what the Swedish tax implications would be in either case. Also, whether this person is an employee or is self-employed is another issue that must be addressed. Either way though, if he is performing services in while Canada, his fees are likely subject to Canadian withholding taxes of 15% under Regulation 105 (see my previous post on this topic).

Payroll withholding generally only applies to employees who regularly report to work at an establishment in Canada. A non-resident employee is generally exempt from this withholding, provided he is subject to tax in his country of residence.

Whether he is actually subject to income tax in Canada with respect to services rendered here is another question, and it depends on the total length of time he spends here, and the provisions of the Canada-Sweden tax treaty. He will likely have to file a Canadian income tax return in any case, to recover the withholding taxes.

The Sojourner Rule

In Canadian Income Tax, Non-residents on May 21, 2010 at 12:37 pm

One of the tests for residency in Canada is called the “Sojourner Rule”. This rule is somewhat similar (but less complex) to the U.S. “substantial presence” test. It would deem a person who is otherwise not a resident of Canada to be resident in Canada for tax purposes if he “sojourned” here for a period of 183 days or more. If this test is met, the individual is deemed to be a Canadian resident for the full year and is subject to tax in Canada on his or her world income, subject to any treaty provision that would override the rule.

Now, what does it mean to sojourn? According to the courts, and the CRA, to sojourn means to be “temporarily present”. Days are calculated such that a part of a day in Canada is considered a full day.

In a recent technical interpretation, the CRA was asked whether, in two hypothetical situations, a taxpayer was ‘‘sojourning’’ in Canada. In the first scenario, the taxpayer arrived in Canada by airplane and had a several hour stopover in Toronto before departing for another destination outside Canada. In the second scenario, the taxpayer arrived in Canada by airplane in the morning and departed by return f light in the evening. The CRA stated that ‘‘sojourn’’ means to make a temporary stay in a place, to remain, or reside for a time. The courts have held that arriving in the morning from another country to work in Canada for the day and then departing in the evening is not tantamount to making a temporary stay akin to sojourning.

The CRA stated that, in the current situation, neither of the described scenarios would be tantamount to a temporary stay and thus would not be sojourning for the purpose of the deemed residency rules.

To “sojourn” means to make a temporary stay in the sense of establishing a temporary residence, although the stay may be of very short duration. For example, if an individual is commuting to Canada for his or her employment and returning each night to his or her normal place of residence outside of Canada, the individual is not “sojourning” in Canada. On the other hand, if the same individual were to vacation in Canada, then he or she would be “sojourning” in Canada and each day (or part day) of that particular time period (the length of the vacation) would be counted in determining the application of the rule.

If you need more information on the sojourning rule, you should check out CRA’s interpretation bulletin IT-221R3.

The End Of The Irritants

In Canadian Income Tax, Estates and trusts, Non-residents on April 6, 2010 at 9:18 am

If you are the executor of an estate with non-resident beneficiaries, life just got a bit simpler. The federal budget of 2010 contained amendments to the definition of “taxable Canadian property” that will eliminate the irritating requirement to file requests for clearance certificates.

Until now, any capital interest in a trust or estate resident in Canada fell under the definition of “taxable Canadian property”. As such, the CRA has always taken the position that any distribution of capital by an executor or trustee constitutes a “disposition” by the beneficiary of a capital interest in that trust or estate. Where the beneficiary is a non-resident of Canada,  section 116 of the Income Tax Act requires that a clearance certificate be obtained within 10 days of the disposition. I discussed section 116 certificates in a previous post.

Most of Canada’s tax treaties would generally serve to exempt the beneficiary from any Canadian tax, so the entire process was often just a formality and a pesky irritant to trustees, and especially to unsuspecting estate executors who simply wanted to make even a partial payment of capital to a beneficiary.

New rules that took effect in 2009 served to reduce the compliance burden by eliminating the need for a clearance certificate where the trustee or executor was certain that the beneficiary was protected by a Canadian tax treaty. However, this required work to make the determination of residency of the beneficiary, analyze the relevant treaty and determine whether the beneficiary was related to the estate, and if so, report the distribution to the CRA.

With the budget of 2010, the definition of “taxable Canadian property” has been amended, and trusts and estates no longer fall within the definition at all, unless they owned significant amounts of Canadian real estate at any time within the prior 60 months.

This change will eliminate a major compliance burden for estate executors. The new rules will also eliminate Canadian private corporations and partnerships from the definition of taxable Canadian property in the same fashion as above.

Some work will still be required to ensure that the assets of the estate or trust have not contained significant real estate, but other than that, these rules are a welcome relief to Canadian executors.