2015-0602781E5 Disposition of farm property by a non-resident

Principal Issues: Non-resident’s obligations under section 116 in respect of disposition of shares of family farm corporation to which subsection 73(4.1) applies.

Position: Subsection 116(5.1) applies for purposes of notifying CRA of the disposition and subsection 73(4.1) applies for purposes of calculating the taxable income earned in Canada. Administrative relief may be given, on a case-by-case basis. In the scenario presented, if the purchaser provides notification under subsection 116(5.02), the non-resident vendor has no obligation under subsection 116(3) because the shares would be excluded property.

Reasons: Application of law, and Canada-Germany treaty.

Author: Graham, Kanwal
Section: 73(4); 73(4.1); 115; 116

XXXXXXXXXX                                2015-060278
                                          Kanwal Graham

February 17, 2017

Dear XXXXXXXXXX

Re:   Certificate of compliance on gifting of family farm corporation shares

We are writing in reply to your email of August 4, 2015 in which you asked whether a non-resident who is disposing of shares of a family farm corporation to her son by way of gift is required to file a form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property, in circumstances where subsection 73(4.1) of the Income Tax Act (the “Act”) applies to the disposition. If the T2062 is required to be filed, you asked what amount is to be reported as the proceeds of disposition, whether a valuation is required, and whether withholding taxes will apply to any calculated gain. You also asked whether the shares in question would be “taxable Canadian property.”

You presented a scenario whereby a resident of Germany wishes to gift shares of the capital stock of a family farm corporation (hereafter referred to as the “Shares”) to her son, who is a resident of Canada. The son, along with his father, would be actively engaged, on a regular and continuous basis, in carrying on the operations of the corporation’s grain farming business in Canada. You indicated that the Shares would meet the definition of “share of the capital stock of a family farm or fishing corporation” within the meaning assigned to that term in subsection 70(10) of the Act and that more than 50% of the value of the Shares would be derived from real property situated in Canada.

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations, however, we offer the following general comments, which may be of assistance to you.

Please note that all legislative references in this letter refer to the Act, unless otherwise specified.

Our Comments

The Act provides that inter-vivos transfers of certain farm property to a taxpayer’s child can occur on a tax-deferred basis. Where the farm property is a share of the capital stock of a family farm or fishing corporation, subsections 73(4) and (4.1) of the Act specify the conditions for application and the resulting tax deferral, respectively. In the scenario you presented, the transfer of the Shares would meet all of the conditions for application and would be eligible for the tax deferral. As a result, the non-resident vendor would have no Part I tax liability under the Act as a consequence of the transfer.

However, because the person disposing of the property would be a non-resident of Canada, the disposition may be affected by section 116 of the Act. Under that section, non-resident vendors disposing of certain taxable Canadian property have to notify the Canada Revenue Agency (the “CRA”) about the disposition either before they dispose of the property or within ten days after the disposition. Form T2062 is used for purposes of the notification and the certain taxable Canadian property does not include property that is “excluded property” as that term is defined in subsection 116(6) of the Act. Meaning, if a non-resident vendor disposes of taxable Canadian property that is excluded property, they are not required to notify the CRA.

“Taxable Canadian property” is defined in subsection 248(1) of the Act, and includes property that is:

“…a share of the capital stock of a corporation (other than a mutual fund corporation) that is not listed on a designated stock exchange…if, at any particular time during the 60-month period that ends at that time, more than 50% of the fair market value of the share…was derived directly or indirectly (otherwise than through a corporation, partnership or trust the shares or interests in which were not themselves taxable Canadian property at the particular time) from one or any combination of…real or immovable property situated in Canada…”

Whether the Shares would constitute taxable Canadian property would be a question of fact. In the scenario you presented, you indicated that more than 50% of the value of the Shares would be derived from real property situated in Canada (footnote 1). Therefore, given it is reasonable to conclude that the Shares would not be listed on a designated stock exchange, the Shares would constitute taxable Canadian property. As such, unless they are excluded property, section 116 would require that a form T2062 be filed with respect to the transfer of the Shares from the non-resident to her son notwithstanding that the non-resident vendor would have no Part I tax liability under the Act as the result of the application of subsection 73(4.1).

Where a non-resident disposes of certain taxable Canadian property by way of gift, or to a non-arm’s length person for either no proceeds of disposition, or for proceeds of disposition that are less than the fair market value of the property, as would be the case in the scenario you presented, subsection 116(5.1) of the Act treats the proceeds of disposition as being equal to the fair market value for purposes of the notification under either of subsections 116(1) or (3) of the Act (i.e., for T2062 reporting purposes). If the fair market value exceeds the adjusted cost base of the property, the non-resident vendor is required to either remit an amount on account of tax or provide appropriate security for the tax. A final settlement of tax would be made when the vendor's income tax return for the year is assessed.

The certain taxable Canadian property which is the subject of subsection 116(5.1) does not include property that is “excluded property” as that term is defined in subsection 116(6). Pursuant to paragraph 116(6)(i), excluded property includes property that is, at the time of its disposition, a treaty-exempt property of the non-resident vendor. “Treaty-exempt property” is defined in subsection 116(6.1) of the Act, and generally means property of a non-resident person, which at the time of the non-resident person’s disposition of the property to another person (the purchaser), is:

*     a treaty-protected property of the non-resident person; and

*     where the purchaser and the non-resident person are related at that time, the purchaser provides notice under subsection 116(5.02) of the Act in respect of the disposition.

“Treaty-protected property” is defined in subsection 248(1) and means property of a vendor, that if disposed of, all of the income or gain derived from the disposition would be exempt from tax under Part I of the Act due to a provision in a tax treaty that Canada has with the country of residence of the vendor.

In the scenario you presented, the vendor would be a resident of Germany. Under paragraph 4 of Article 13 of the Agreement Between Canada And The Federal Republic Of Germany For The Avoidance Of Double Taxation With Respect To Taxes On Income And Certain Other Taxes, The Prevention Of Fiscal Evasion And The Assistance In Tax Matters (the “Treaty”), gains from the sale of shares (other than shares listed on an approved stock exchange in the other Contracting State) forming part of a substantial interest in the capital stock of a company which is a resident of Canada, the value of which shares is derived principally from immovable property situated in Canada, may be taxed in Canada. For the purposes of this paragraph, however, the term “immovable property” does not include property (other than rental property) in which the business of the company, partnership, trust or estate is carried on.

In the scenario you presented, the value of the Shares would be principally derived from immovable property (i.e., real property that is farmland) situated in Canada. However, the farmland would be property in which the business is carried on and as such, it would be excluded from the term “immovable property” for purposes of paragraph 4 of Article 13 of the Treaty. Furthermore, pursuant to paragraph 6 of Article 13 of the Treaty, any gain from the sale of the Shares would only be taxable in Germany, and as such, would be exempt from tax under Part I of the Act (footnote 2). Therefore, the Shares would meet the definition of treaty-protected property (footnote 3).

As noted above, pursuant to subsection 116(6.1), if the property is treaty-protected property and, where the purchaser and the non-resident person are related at the time of the disposition, the purchaser provides notice under subsection 116(5.02) in respect of the disposition, the property will be treaty-exempt property. This notice is generally provided using form T2062C and must be made within 30 days of the date of acquisition by the purchaser.

In the scenario you presented (footnote 4), as long as notification is provided under subsection 116(5.02) (i.e., form T2062C is filed) by the purchaser, the Shares would meet the definitions of treaty-exempt property and excluded property. Consequently, the non-resident vendor would not be required to file a T2062.

In the case that no notification is provided under subsection 116(5.02), or where the Shares are not treaty-protected property (footnote 5), then the non-resident vendor would be required to make the request for a certificate of compliance. In that case, the proceeds of disposition that would be reported on the T2062 would be an amount equal to the fair market value pursuant to subsection 116(5.1). If a gain were to result, an amount in respect of tax, or acceptable security, would be required to be remitted. The non-resident would then file an income tax return, wherein the farm rollover rules of subsection 73(4.1) would apply to reduce the gain to nil, and a refund of the tax remitted (or a return of the security provided) could be obtained. Administratively however, in situations such as this one, the CRA may accept a T2062 which reported the proceeds of disposition in an amount equal to the adjusted cost base, and such determination would be made on a case-by-case basis. As indicated in the instructions sections of the T2062, the non-resident vendor must provide documentation to support the adjusted cost base and proceeds of disposition, and where the transaction does not occur at arm’s length, the non-resident is to include an appraisal report determining the fair market value of the property at the time of disposition or a letter of opinion from an appraiser. Such appraisal would also support the assertion that subsection 73(4.1) applied, as it would provide evidence that the Shares would meet the definition of “share of the capital stock of a family farm or fishing corporation” (as that term is defined in subsection 70(10)).

We trust these comments are of assistance.

Yours truly,

Lori Michele Carruthers, CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 A valuation of the Shares would substantiate that they meet the definition of taxable Canadian property.

2 If, however, the non-resident vendor was disposing of the Shares within 10 years of emigrating from Canada, paragraph 7 of Article 13 of the Treaty would override paragraph 6 and would apply to allow Canada to tax any gain from the sale of the Shares. If paragraph 7 of Article 13 of the Treaty were to apply, the Shares would not be exempt from tax under Part I of the Act due to a provision in the Treaty.

3 Unless paragraph 7 of Article 13 of the Treaty applied which would result in the Shares not being treaty-protected property.

4 Absent the application of paragraph 7 of Article 13 of the Treaty.

5 For example, because of the application of paragraph 7 of Article 13 of the Treaty.

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, 2017

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, 2017