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.