2021-0905871E5 Section 116 Certificate

Principal Issues: 1. Where the non-resident Estate obtained a certificate under subsection 116(2) of the Act and further disposes of “taxable Canadian property”, is there a requirement for the Estate to file a return of income pursuant to paragraph 150(1)(c) of the Act? 2. Does the distribution of cash from the non-resident Estate to the non-resident beneficiary in respect of the beneficiary’s capital interest in the Estate result in a disposition of “taxable Canadian property” as defined in subsection 248(1) of the Act? 3. If question #2 is answered by the affirmative, is the disposition of the non-resident beneficiary's capital interest in the Estate an "excluded disposition"? 4. If question #2 is answered by the affirmative, is there a requirement for the non-resident beneficiary to request a certificate pursuant to section 116 of the Act?

Position: 1. No. 2. Yes. 3. Yes. 4. No.

Reasons: 1. In the case at hand, the disposition of the Property by the Estate is an excluded disposition since all conditions in subsection 150(5) of the Act are met. Therefore, subsection 150(1.1) of the Act would apply and as a result, the Estate would not be required to file a return of income for the year. 2. Pursuant to the definition of "taxable Canadian property" in subsection 248(1) of the Act, the non-resident beneficiary's capital interest in the Estate would be considered "taxable Canadian property" pursuant to paragraph (d) of that definition, because at any particular time during the 60-month period that ends at the time of the disposition more than 50% of the fair market value of the non-resident beneficiary’s capital interest in the Estate was derived from real or immovable property situated in Canada. 3. The beneficiary's capital interest in the Estate would be considered excluded property because it qualifies as treaty-exempt property. The disposition of the non-resident beneficiary’s capital interest in the Estate would be considered an “excluded disposition” for the purposes of subsections 150(1.1) and 150(5) of the Act. 4. The non-resident beneficiary would not be required to request a certificate under section 116 of the Act because the non-resident beneficiary's capital interest in the Estate is "excluded property" under subsection 116(6) of the Act.

Author: Girard, Pierre
Section: 116(1), 116(5), 116(5.01), 116(5.02), 116(6), 116(6.1), 150(1), 150(1.1), 150(5), 248(1), 251(2), 251(6) of the Act and Article XIII of the Canada-U.S. Tax Convention

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                                                                                   P. Girard, LL.B, M. Tax.
                                                                                   2021-090587

July 25, 2022

Dear Sir:

Re: Technical Interpretation – Clearance Certificate

This is in reply to your email of July 26, 2021 in which you requested a technical interpretation with respect to the requirement of a non-resident trust to obtain a clearance certificate under section 116 of the Income Tax Act when distributing assets from an estate, and the requirement to file an income tax return in a particular situation.

In particular, you presented the following scenario:

* An estate that does not reside in Canada (the “Estate”) was created on the death of an individual.

* The deceased was a resident of Canada and the sole executor and beneficiary is the deceased’s daughter, who is a resident of the United States of America.

* At the time of death, the assets that belonged to the taxpayer consisted of a condo situated in Canada (the “Property”) as well as cash.

* The Property was the deceased’s principal residence. The capital gain that resulted from the deemed disposition upon death qualified for the principal residence exemption.

* At the time of death, the fair market value of the Property represented more than 50% of the value of the deceased’s assets or the Estate’s.

* The deceased’s return of income for the year 2020 was filed.

* The Estate sold the Property in February 2021 and no capital gain resulted from the disposition of the Property.

* Prior to the sale of the Property, the Estate requested and was issued a certificate under section 116 of the Income Tax Act.

* Since the sale of the Property, the assets of the Estate are solely comprised of cash.

* The Estate’s net income in 2021 is nil and there is no tax payable for that year.

* The non-resident beneficiary of the Estate did not dispose of any other taxable Canadian property in the 2021 tax year and does not have any outstanding liability under the Act with respect to any previous taxation years.

In light of the above mentioned facts, you asked the following questions:

1) Is there a requirement for the Estate to file a return of income for the taxation year 2021 considering there are no other income or deductions to report for that year?

2) In the event of a distribution (cash) to the non-resident beneficiary, is there a requirement for the non-resident to request a certificate pursuant to section 116 of the Income Tax Act, given that more than 50% of the cash in the Estate is attributable to the sale of the Property?

Every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter and each reference to a technical tax term has the same meaning as such term has in the Act.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by the Income Tax Rulings Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R11, Advance Income Tax Rulings and Technical Interpretations, dated April 1, 2021. The following general comments may be of assistance.

With respect to your first question, we provide the following comments.

Pursuant to subsection 248(1), a trust includes an estate. For the purpose of the Income Tax Act, subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property. Subsection 248(1) also defines “individual” to be a person other than a corporation. Therefore, a trust (estate) is generally a “person” and an “individual” for the purpose of the Income Tax Act.

Unless one of the exceptions provided for in subsection 150(1.1) applies, estates and trusts are generally required, pursuant to paragraph 150(1)(c), to file with the Minister a return of income, in prescribed form and that contains prescribed information, within 90 days from the end of each taxation year.

Pursuant to subsection 150(1.1), where the individual (which includes an estate) is a non-resident throughout the year, the filing of a return of income is not required unless the individual has tax payable under Part I of the Income Tax Act, has a taxable capital gain (otherwise than from an excluded disposition) or disposes of a taxable Canadian property (otherwise than in an excluded disposition).

Although in the situation at hand no taxable capital gain arises from the disposition of the Property, the Estate would have to file a return of income for the 2021 taxation year because the Property was taxable Canadian property (“TCP”) for the purpose of the Income Tax Act, unless the disposition qualifies as an excluded disposition.

To qualify as an excluded disposition, all of the conditions identified in subsection 150(5) must be met:

1. The taxpayer is a non-resident at the time of disposition (150(5)(a));

2. No tax is payable under Part I of the Income Tax Act by the taxpayer (150(5)(b));

3. The taxpayer is, at the time of disposition, not liable to pay any amount under the Income Tax Act in respect of any previous taxation year (150(5)(c)); and

4. Each TCP disposed of by the taxpayer is:

a. Excluded property within the meaning assigned by subsection 116(6) (150(5)(d)(i)); or

b. A property in respect of which the Minister has issued to the taxpayer a certificate under subsection 116(2), (4) or (5.2) (150(5)(d)(ii)).

Given the scenario that you presented, these conditions would appear to be met and the disposition of the Property would be an excluded disposition. Therefore, subsection 150(1.1) would apply and as a result, the Estate would not be required to file a return of income for the 2021 taxation year.

With respect to your second question, where a trust distributes assets in satisfaction of a non-resident beneficiary's capital interest in the trust, the beneficiary is considered to have disposed of that interest. The disposition of the capital interest will be considered to be a disposition of TCP as defined in subsection 248(1) pursuant to paragraph (d) 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 interest was derived directly or indirectly from real or immovable property situated in Canada (or any other situations described in subparagraphs 248(1)(d)(ii) to (iv) of the definition of TCP).

Generally, subsection 116(1) provides that if a non-resident person proposes to dispose of TCP, the non-resident person may, at any time before the disposition, send the Minister a notice setting out certain information with respect to the purchaser of the property, the property, the estimated proceeds of disposition and the adjusted cost base of the property. This is done by completing form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. Where the notice under subsection 116(1) was not sent to the Minister, subsection 116(3) requires that within 10 days of the date of the disposition of the TCP, the non-resident person sends the Minister a notice setting out certain information with respect to the disposition. Again, this is done by completing form T2062.

There are certain situations where a non-resident person is not required to send the notice provided for under subsections 116(1) and/or 116(3). Such situations include those where the property disposed of is property described in subsection 116(5.2) or where the property is excluded property.

Pursuant to paragraph 116(6)(i), excluded property includes a property that is, at the time of its disposition, a treaty-exempt property of the person. Pursuant to subsection 116(6.1), two conditions must be satisfied for a property to qualify as treaty-exempt property. The first condition is that the property of the non-resident has to be treaty-protected property at the time of its disposition by the non-resident. The second condition requires that, where the non-resident and the purchaser are related at the time of disposition, that the purchaser provides the notice under subsection 116(5.02) in respect of the disposition.

The term “treaty-protected property” is defined under subsection 248(1) as a property any income or gain from the disposition of which by the taxpayer at that time would, because of a tax treaty with another country, be exempt from tax under Part I.

This definition requires to look into the Convention between Canada and the United States of America (the “Convention”). Article XIII(3)(b)(iii) of the Convention provides that an interest in a trust is real property situated in Canada where the value of the interest derives principally from real property situated in Canada. Article XIII(1) of the Convention mentions that the gains derived by a resident of a Contracting State (here, the U.S.) from the alienation of real property situated in the other Contracting State (here, Canada) may be taxed in that other State (here, Canada).

As will be explained hereafter, in your given situation, the value of the interest in the Estate does not derive principally from real property situated in Canada.

The wording used in Article XIII(3)(b)(iii) of the Convention differs from that used in the definition of TCP under subsection 248(1). The main difference resides in the timing of the determination as to whether the value of an interest in a trust is derived principally from real property situated in Canada. According to paragraph (d) of the definition of TCP in the Act, such time is any particular time during the 60-month period that ends at the relevant time. On the other hand, the Convention does not provide for a similar look-back rule.

In light of the above, we are of the view that where a trust only holds the proceeds from a previous sale of property that was situated in Canada, the interest in the trust would not be considered “real property situated in the other Contracting State” for the purpose of the Convention. However, for the purpose of the Income Tax Act, the interest in the trust could still be TCP provided that in the 60-month period prior to the sale of the interest in the trust, more than 50% of its fair market value derived, directly or indirectly, from real property situated in Canada.

In your given situation, after the Property was sold by the Estate, the assets in the Estate consisted entirely of cash. Therefore, despite the fact that more than 50% of this cash are proceeds from the sale of the Property, the beneficiary’s interest in the trust would not be “real or immovable property in the other Contracting State” for the purpose of the Convention and, as such, there is no provision in the Convention that could provide for a taxation, in Canada, of the disposition of the beneficiary’s interest in the Estate. Based on these facts, the condition set forth in paragraph 116(6.1)(a) would thus be met because the property would be “treaty-protected property”. Similarly, the other condition provided in paragraph 116(6.1)(b) would also be met as the Estate is not related to the beneficiary in your situation.

As a result, based on the particular facts of the situation at hand the beneficiary’s capital interest in the Estate would appear to qualify as treaty-exempt property as well as excluded property pursuant to subsections 116(6) and (6.1). Consequently, the obligations under section 116 would likely not apply in your specific case.

For further information on clearance certificates please refer to Information Circular IC82-6R12 Clearance Certificate.

We trust these comments will be of assistance.

Yours truly,

Gillian Godson
A/Manager, Administrative Law Section
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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