2013-0494251E5 128.1(4) AND PART XIII TAX ON FUTURE PAYMENTS

Principal Issues: (1) Is a right to receive income based on the use of or production from a client list subject to the deemed disposition on emigration? (2) Post emigration, how are such payments to the non-resident subsequently taxed in Canada?

Position: (1) Yes, a disposition of the right is deemed to occur as a result of emigration. (2) Subsequent payments would fall under paragraph 212(1)(d)(v) subject to relief under a tax treaty.

Reasons: (1) A right to such payments is a “property” as that term is defined in subsection 248(1) of the Act, and not otherwise excluded from the application of 128.1(4)(b). (2) Subsequent payments made to the non-resident of Canada that are dependant solely on the use of or production from a client list in Canada are contemplated under 212(1)(d)(v) of the Act. However, article XII(3) of the Canada-US Treaty generally provides an exemption from Part XIII taxation to a US resident in respect of payments arising in Canada for the use of, or the right to use, any patent or any information concerning industrial, commercial or scientific experience.

Author: Demeter, Robert
Section: 12(1)(g), 128.1(4)(b), 212(1)(d)(v), the definition of “property” in subsection 248(1), article XII of the Canada-US Tax Convention

XXXXXXXXXX

2013-049425
Shelley Helmer
613-957-2103

April 21, 2015

Dear XXXXXXXXXX:

Re: 128.1(4)(b) deemed disposition and Part XIII taxation

We are writing in response to your emails of May 28 and June 6, 2013, and subsequent telephone discussions (XXXXXXXXXX/ Helmer/Demeter) in which you described a hypothetical situation involving an individual (“Mr. X”) that emigrated from Canada to the United States of America (the “US”). At the time of his emigration, Mr. X was entitled to future payments (the “Payments”) from another person resident in Canada that had purchased a client list related to a business previously carried on by Mr. X. The amount of the Payments to be made to Mr. X were to be determined based on the purchaser’s use of or production from the client list over a defined period, such that any Payments received by Mr. X prior to his emigration were included in his taxable income pursuant to paragraph 12(1)(g) of the Income Tax Act (the “Act”).

You have asked for our comments as to the application of paragraph 128.1(4)(b) of the Act to Mr. X’s right to future Payments, in addition to the application of Part XIII withholding tax on any Payments made subsequent to his emigration from Canada.

As you have noted in your submissions, paragraph 128.1(4)(b) of the Act deems a taxpayer to have disposed of each property owned by him, other than properties which fall within the exceptions in subparagraphs (i) through (v) of that provision. For this purpose, we are of the view that Mr. X’s right to Payments is a right that is contemplated in the definition of “property” at subsection 248(1) of the Act, which includes “a right of any kind whatever”. As the right is not one that is otherwise described within the exceptions in paragraph 128.1(4)(b), Mr. X would be deemed to have disposed of the right to receive Payments for proceeds equal to the fair market value of the right pursuant to paragraph 128.1(4)(b) of the Act as a result of his emigration. (endnote 1)

In addition, to the extent that the Payments made to Mr. X subsequent to his emigration would be dependent on the use of or production from the client list in Canada, we are of the view that such portion would be subject to Part XIII withholding tax pursuant to subparagraph 212(1)(d)(v) of the Act. Also, such Payments would be included in the meaning of “royalties” within paragraph 4 of article XII of the Canada-US Tax Convention (the “Treaty”),which includes payments received as consideration “for information concerning industrial, commercial or scientific experience”. However, payments arising in Canada that are beneficially owned by a resident of the US and that are for the use of any information concerning industrial, commercial or scientific experience would be taxable only in the US, and not subject to Part XIII tax pursuant to paragraph 3 of article XII of the Treaty.

We trust our comments are of assistance.

Yours truly,

Robert A. Demeter, CPA, CGA
Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1. See comments in document 2006-0196211C6, which considered the treatment of earn-out payments before the 2006 Conference of L’Association de planification fiscale et financière.

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015