Relief for Non-Residents of Canada on Canadian Property Dispositions
Budget 2010 proposes significant changes to Canada’s international tax rules. Effective for dispositions after March 4, 2010, the liability for Canadian tax on gains from the disposition of Canadian investments will be eliminated in many cases, together with the reporting and withholding requirements, enhancing the ability of Canadian businesses to attract foreign venture capital.
Subject to the provisions of applicable tax treaties, Canada currently taxes non-residents on their income and gains from the disposition of "taxable Canadian property." A purchaser acquiring such property from a non-resident is required to withhold part of the purchase price and remit such funds to the government on account of the non-resident vendor’s potential Canadian tax liability, unless the non-resident vendor obtains a "clearance certificate" from the Canada Revenue Agency (CRA) or unless the property is "excluded property," such as shares of Canadian corporations listed on a recognized stock exchange. To obtain a clearance certificate, a non-resident vendor must remit an amount to the CRA on account of the non-resident’s potential Canadian tax liability, post security, or satisfy the CRA that no tax will be due. Non-resident investors were frustrated with the need to obtain such certificates, which were generally delayed many months, and the need to file Canadian income tax returns, particularly where no Canadian tax was ultimately payable on any gains due to a treaty exemption. For example, gains from the disposition of shares of a Canadian resident corporation are ordinarily exempt from Canadian taxation under most treaties, provided that such shares do not derive their value principally (more than 50 per cent) from real or immovable property situated in Canada.
Budget 2010 proposes an important relieving measure to exclude from the definition of taxable Canadian property shares of corporations, and certain other trust and partnership interests, that do not at any time during the 60-month period prior to the determination time derive their value principally (more than 50 per cent) from one or any combination of (i) real or immovable property situated in Canada, (ii) Canadian resource property, (iii) timber resource property, or (iv) options or interests in respect of the foregoing.
Certain property is deemed to be taxable Canadian property in certain circumstances (e.g., under the reorganization provisions where the exchanged property was taxable Canadian property). Budget 2010 will amend these provisions such that the deeming rule will apply only for 60 months after the relevant disposition.
These amendments will align the Canadian rules more closely with Canada’s tax treaties and the domestic rules of various OECD (Organisation for Economic Development) countries including the United States. This measure also builds upon recent changes introduced in Budget 2008 that eased compliance requirements on the disposition by a non-resident of taxable Canadian property where treaty exemptions were applicable, particularly in the case of non-arm’s-length dispositions.
These changes have been welcomed by foreign private equity and venture capital firms as removing a barrier to directly investing in Canadian technology, bioscience and other private corporations. Previously, to avoid the need to obtain clearance certificates on behalf of each of many investors in a venture or private equity fund, especially if structured as a limited partnership, an offshore "blocker entity" such as a Luxembourg subsidiary was used to make the Canadian investment. As a result of the changes, such costly and complex legal structures can be eliminated.
The CRA has stated that it will apply these proposed changes after March 4, 2010, notwithstanding that the Budget 2010 proposals are not yet enacted.