2017-0705801I7 non-TCP net capital loss

Principal Issues: Can a non-resident corporation which incurs a capital gain on the disposition of taxable Canadian property (“TCP”) which is not treaty-protected property offset the taxable capital gain with net capital losses that arose as a result of a deemed disposition of non-TCP upon emigration from Canada?

Position: Yes.

Reasons: Net capital loss pursuant to 111(8) computed for a year for which taxpayer was a resident is not subject to the restriction in 111(9).

Author: Graham, Kanwal
Section: 115(1); 111

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Use of pre-emigration net capital loss in a post-emigration period

This is in reply to your email of May 17, 2017 regarding the availability of a pre-emigration net capital loss in a post-emigration period. You described a scenario whereby a corporation, upon emigration from Canada and pursuant to subsection 128.1(4) of the Income Tax Act (“Act”), incurred a capital loss on the deemed disposition of property which was not taxable Canadian property (“TCP”). The corporation was unable to utilize the resulting allowable capital loss in the year in which it was incurred. Subsequent to the emigration, at a time when the corporation was a non-resident of Canada, the corporation disposed of TCP (which was not treaty-protected property) and realized a capital gain. You asked whether, in this scenario, the corporation could utilize the net capital loss it incurred upon emigration to offset the taxable capital gain it realized on the disposition of the TCP.

Your view

In your email you concluded that the non-resident corporation should be able to offset the capital gain on the disposition of TCP with the net capital loss carried forward from the time when it was a resident of Canada.

Our comments

We concur with your view.

Pursuant to subparagraph 115(1)(a)(iii) of the Act, a non-resident of Canada that disposes of TCP (other than treaty-protected property) for which a capital gain results is required to include the taxable capital gain in its computation of taxable income earned in Canada. However, under paragraph 115(1)(d) of the Act, the taxable income may be reduced by certain loss carry-overs as determined pursuant to subsection 111(1) of the Act, including a net capital loss under paragraph 111(1)(b) of the Act. The net capital loss of a taxpayer for a taxation year is defined in subsection 111(8) of the Act. Given the scenario presented in your email, the corporation would, due to the deemed disposition rule in subsection 128.1(4) of the Act, have a net capital loss for the year ended immediately prior to its emigration. Pursuant to subsection 111(9) of the Act, there are restrictions on the determination of a net capital loss for a year in which a taxpayer is a non-resident, however, where a net capital loss occurs in a year in which a taxpayer is a resident of Canada, this restriction does not apply.

Consequently, when computing its taxable income earned in Canada, a non-resident may offset a taxable capital gain on the disposition of TCP (other than treaty-protected property) with a net capital loss on the deemed disposition of property that was not TCP that arose when the taxpayer was a resident of Canada.

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Yours truly,

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

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