Fairness and predictability for non-resident investors

In a nutshell

It’s important to ensure non-resident taxpayers pay applicable Canadian income tax in a timely fashion. But the current application of s. 116 of the Income Tax Act creates uncertainty, delays and costs to non-resident investors

In a recent submission, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada made several recommendations to ensure s. 116 is better administered to achieve its goals more effectively, without discouraging investment in Canada.

How section 116 works

Section 116 is designed to ensure that non-resident taxpayers who dispose of taxable Canadian property report the disposition to the Canada Revenue Agency and pay any applicable Canadian income tax.

Under this regime, a non-resident vendor must notify the Minister of National Revenue of the disposition. The CRA will then issue a certificate of compliance once it has received payment of 25 per cent of the estimated or actual gain—or satisfactory security. If this certificate is not provided, the purchaser becomes liable to remit 25 per cent of the purchase price to the Receiver General.

To avoid that liability, purchasers typically withhold 25 per cent of the gross purchase price until a certificate is issued. Usually, when the vendor has applied for a certificate of compliance, the CRA will issue a “comfort letter” confirming the purchaser may continue to withhold that 25 per cent of the purchase price without liability for interest or penalties until the CRA has completed its review.

The purchaser will be able to release the withheld funds – and finalize its involvement with the vendor – once the s. 116 certificate is issued by the CRA. This can often take more than a year.

Delays and uncertainty

Indeed, one major issue is that comfort letters are not always issued promptly before the remittance deadline. This forces purchasers to remit 25 per cent of the cost of the transferred property to the Receiver General by the remittance deadline, which can be earlier than the issuance of a s. 116 certificate.

According to the Joint Committee, this “results in significant commercial uncertainty and can lead to frustration, anxiety and panicked scrambling at month end.” It would be much easier for everyone – including the CRA – if there was an automated system delivering a comfort letter when an application for a certificate of compliance is received.

The Joint Committee also recommends the CRA clarify that where a purchaser reasonably believes the non-resident vendor has applied for a s. 116 certificate, the purchaser should be allowed to continue to withhold the funds until the CRA has completed its review, regardless of whether remittance deadline has passed.

This would be consistent with the purpose of s. 116, writes the Joint Committee, “since, in all cases, the purchaser would continue to hold the withheld funds in trust until such time as the CRA confirms how much Canadian tax is owing, such that the Minister has certainty regarding the availability of the funds should a remittance to the CRA ultimately be required.”

Allowing withheld funds to cover vendor tax liability

The Joint Committee further recommends that the CRA update its comfort letter language to explicitly allow non-resident vendors to instruct purchasers to remit some or all of the withheld funds to the CRA on their behalf.Such remittances would count toward the vendor’s Part I tax liability related to the disposition and would also reduce the purchaser’s potential liability under subsection 116(5).

Read the submission.