DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Posts Tagged ‘Section 216’

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.

Wright is Wrong….Again!!!

In Canadian Income Tax, Non-residents on January 5, 2010 at 4:04 pm

Once again, I am personally forced to swallow a tough court decision, as the case of Pechet v. The Queen (2009 DTC 5189) has been dismissed by the Federal Court of Appeal. This case overturned the informal procedure Tax Court decision of Wright v. The Queen (2001 DTC 437) originally argued  (and won) by yours truly.

The Wright case dealt with interest on unpaid non-resident withholding taxes. Under Part XIII of the Act, anyone paying rent to a non-resident must withhold tax based on the gross amount paid. The rate is 25% unless reduced by treaty. The basis for withholding may be reduced to the net amount after expenses if an undertaking is filed with the CRA and form NR6 is filed. (For more, see my post on Non-resident Real Estate Investors)

If the non-resident recipient files an income tax return under section 216 of the Act by the required deadline, tax under Part I of the Act is applied “in lieu of” the Part XIII tax withheld. In essence, any tax withheld in excess of the Part I liability is refunded.

Where the Part XIII tax is not withheld, but the section 216 is filed, the CRA’s position is to charge interest based on the withholding tax that should have been remitted. The original argument in Wright was that if the filing of the 216 return replaces the Part XIII liability with the Part I liability, then there is no longer any tax upon which an interest calculation may be made. The Tax Court agreed, and a loophole seemed to be exposed.

The Pechet case heard in Tax Court overturned Wright, but there was still a glimmer of hope as it was appealed to the Federal Court of Appeal.

Now, sadly, it appears my own personally victory remains just that. Since decisions in  the informal procedure cannot be appealed, my client’s victory is final and my Tax Court record is still 3-0. However, my legacy as a precedent-setting barrister is over for good.

The Court of Appeal in Pechet upheld the decision of the lower court and concluded that the filing of a return under section 216 of the Act does not retroactively eliminate the requirement to withhold under Part XIII. Rather, the withholding requirements continue to apply, up until the point in time when the tax liability of the non-resident has shifted from Part XIII to Part I. The phrase “in lieu of” does not mean that the Part XIII liability never existed, but that it is replaced, at the time of the filing of the return, with the Part I tax liability. Any interest accruing on unpaid withholding tax up to that point must be paid.

This interpretation, in all fairness, seems to be the correct application of the provisions, given the scheme and intent of the Income Tax Act as it applies to non-resident taxpayers.

Non-Resident Investors In Canadian Real Estate

In Canadian Income Tax, Non-residents on September 29, 2009 at 5:20 pm

Maybe it’s the global warming thing, but Canada has suddenly become a very popular destination for non-residents (“NR”) investing in real estate. What are the tax rules for non-resident investors, and what investment vehicle should be used?

Non-Resident Investors

A NR investor is subject to withholding taxes under Part XIII of the Act. Generally, 25% of gross rents must be remitted to the CRA each month. An election under section 216 may be made. Under this election, the NR files a tax return and is eligible for the same deductions as Canadian residents including capital cost allowance. However, it does not entitle the NR to loss carryovers from prior years.

A survey of the tax rules would be advised prior to investing in Canadian real estate

A survey of the tax rules would be advised prior to investing in Canadian real estate

If form NR6 is filed, the NR undertakes to file a return within 6 months from the end of the year, and the tax withheld is reduced to 25% of the estimated income after deductions. Where no undertaking is filed, the tax withheld is 25% of the gross rent, but the deadline for filing a return is extended to 2 years.

Under certain circumstances a NR paying interest to another NR may also be subject to withholding taxes on the interest payments.

A NR corporation would be subject to further withholding requirements known as branch tax. This tax is intended to equal dividend withholding tax on profits repatriated out of Canada by the NR corporation. The branch tax rates are similar to withholding rates for dividends, subject to treaty reductions. NR corporations are also subject to tax on capital in certain provinces. Finally, an NR corporation may be subject to “thin capitalization” rules that restrict interest deductions.

A NR trust pays no branch tax or tax on capital. Losses of a trust , however, cannot be flowed out to beneficiaries.

Using a  Canadian Investment Vehicle

The two major choices for a Canadian investment vehicle is the Canadian resident trust or the Canadian corporation.

A Canadian corporation is subject to the full rates of tax on investment income. Unless it qualifies as a Canadian controlled private corporation, no part of the taxes payable will be refundable upon the payment of dividends. Dividend payments will be subject to withholding taxes of 25%, unless reduced by treaty. Further, in certain provinces, a Corporation is subject to tax on capital. Thin capitalization rules apply as well. These factors make this vehicle an unpopular choice for most NR investors.

A Canadian trust is not subject to tax on capital. Nor would the payments to beneficiaries of after-tax income be subject to any withholding taxes. Thus, the trust would be subject to tax only once, at the highest marginal tax rates for individuals. This rate could vary, depending on the province of residence of the trust.

Dispositions of Real Estate by Non-Residents

As taxable Canadian property, a gain on the disposition of real estate by a non-resident is generally subject to Canadian tax at Canadian rates for capital gains and recaptured capital cost allowance.

Withholding taxes must be remitted, and may be based on the gain on sale only where a withholding tax certificate is obtained under section 116 of the Act. If no certificate is requested by the due date (either before the sale, or within 10 days following the sale), then the purchaser is required to withhold based on the gross purchase price. The withholding rate is 25%. An additional 12% applies for the province of Quebec, which has its own certificate request procedure under Article 1097.

One common problem that arises when a NR disposes of Canadian real estate is that a 116 certificate will only be issued if all the withholding requirements have been met in the past. That is, if no returns were filed under section 216, then the CRA will require remittance of 25% of gross rents for the previous years plus interest. If the 2 year deadline has passed, the CRA will normally not accept late-filed 216 returns.