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“DEALING WITH NON-RESIDENTS” May 19_ 2010

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“DEALING WITH NON-RESIDENTS” May 19_ 2010 Powered By Docstoc
					   “DEALING WITH
   NON-RESIDENTS”
     May 19, 2010

  Rob Martini
Gwen Benjamin
Robin MacKnight     1
    Non-Residents: Section 116 and
      Taxable Canadian Property

•   Budget 2010 Changes
•   Builds on 2008 changes
•   TCP Definition Narrowed
•   Encourage Non-Resident Investment?


                                         2
    Non-Residents: Section 116 and
      Taxable Canadian Property


•   Summary of Original Rules
•   Summary of 2008 Changes
•   2010 Changes are Domestic
•   2010 Not Based on Treaty Status



                                      3
    Non-Residents: Section 116 and
      Taxable Canadian Property
• Proposed TCP Definition
• Shares not TCP unless >50% of FMV
  from:
    i.     Canadian real estate;
    ii.    Canadian resource properties;
    iii.   Timber resource properties;
    iv.    Options in above
•    60 Month Look-Back Rule
•    Non-Resident can be in any jurisdiction
                                               4
    Non-Residents: Section 116 and
      Taxable Canadian Property
EXAMPLE:
                                                         Non-Resident Company
                              Turks & Caicos Co.

• Shares Not TCP
• No s.116 required                         Shares
• No Canadian Tax

                                     Canco




                               Business Assets
   • Based on 60 month test   (“Non-Qualifying” Assets
                                  less than 50%)



                                                                                5
   Non-Residents: Section 116 and
     Taxable Canadian Property


• Compliance Issues
• Due Diligence
• Treaties Still Relevant (ie. 60 month lookback)




                                                    6
    Non-Residents: Section 116 and
      Taxable Canadian Property


•   Planning Consideration
•   Non-Residents/Tax Haven Holdcos
•   Non-Resident Ownership/Freezes?
•   Capital Gains vs. Dividends
•   Ceasing/Commencing Canadian
    Residency
                                      7
Section 116 Trusts and
       Estates




                         8
   Capital Interest in a Trust
• A “disposition” includes a transfer of
  property that is part of a taxpayer’s capital
  interest in a trust (ss 248(1))
• Includes a capital distribution to a non-
  resident beneficiary of a trust or estate




                                                  9
      Clearance Certificates
• Under section 116, general rule – if a non-
  resident person proposes to dispose of
  taxable Canadian property, other than
  excluded property, a clearance certificate
  is required.




                                            10
              Pre Budget
• The trust/estate is considered a
  “purchaser” by CRA and CRA considers
  that there has been an acquisition for the
  purposes of section 116 when a capital
  distribution is made to a non-resident
  beneficiary. (2005-0149961E5)



                                               11
             Post Budget
• Notice of Ways and Means March 22,
  2010 Tabled as Bill C-9 effective after
  March 4, 2010
• Definition of “taxable Canadian property”
  amended to exclude interests in trusts
  resident in Canada that do not derive their
  value, at the time, or within the previous
  60 months of the time, principally from real
  or immovable property situated in Canada
                                             12
                   Notice?
• If it’s NOT taxable Canadian property (ie.
  Value of estate/trust does not pertain
  principally to real estate), section 116 does
  not apply.
• If it is taxable Canadian property, file a notice
  under 116(3) if it is not treaty-protected.
• If it is taxable Canadian property, file form
  T2062C if it is treaty-protected and the
  beneficiary is related to the estate/trust.
                                                  13
                 Example
• Estate –
• Assets consist of proceeds of principal
  residence of $500,000 and proceeds of a life
  insurance policy $250,000.
• Estate Trustee is sister of non-resident
  beneficiary. Non-resident is a resident for
  treaty purposes of the US.
• More than 50% of the value is derived from
  property that is real property. Therefore the
  interest in the estate is taxable Canadian
  property.
                                              14
• Beneficiary’s capital interest is
  $375,000.00
• If no clearance certificate is obtained, the
  Executrix should withhold and remit
  $93,750.00 within 30 days of the end of
  the month following the distribution.



                                                 15
  Foreign Investment Entities
• Legislation governing the taxation of offshore
  investment funds introduced in 1984.
• In 1999 series of draft legislation on FIEs
  started.
• 2010 Budget goes back to the existing rules
  on foreign investment funds with some
  amendments.
• Comments to be submitted by early May-
  legislation will come later.
                                               16
• Section 94.1 applies generally where there
  is an interest in a non-resident entity which
  mainly derives value from portfolio
  investments and one of the main reasons
  for the taxpayer holding the interest is to
  derive a benefit in such a manner that the
  taxes are significantly less than they would
  have been if the income, profit and gains
  were earned directly by the taxpayer.
                                              17
• If the test is met, include in income the
  amount by which the product obtained
  when the “designated” cost is multiplied by
  1/12 of the prescribed rate of interest for
  that period, less any other amount
  included in income in respect of the fund.



                                            18
• FIE rules were not just about an avoidance
  motive; any investment in a fund outside
  Canada that pays little or no domestic tax.
• Some minor amendments in the Budget:
  − increases prescribed rate;
  − reassessment period extended by three
    years;
  − reporting requirements expanded.

                                            19
       Non-Resident Trusts
• Budget 2010 reintroduces the rules of
  section 94
• “Simplification”




                                          20
• “Resident contributor” no longer jointly and
  severally liable for a proportionate share of
  trust’s income.




                                              21
• Divides the trust property into resident and
  non-resident portions. Generally the non-
  resident portion is to be excluded from tax
  in Canada.




                                             22
• New ordering rules for distributions to trust
  beneficiaries. Distributions to Canadian
  resident beneficiaries will be deemed to be
  made first out of the resident portion and
  then out of the non-resident portion of the
  trust’s income.



                                              23
• Distribution to a non-resident beneficiary
  of resident portion of income will be
  subject to withholding.




                                               24
• Extends reassessment period by three
  years.
• Tax Conventions Interpretation Act
  amended.
• Generally, applies retroactively to 2007
  and later tax years.



                                             25
             Recent Cases
•   Tax for Tough Times
•   Directors Liability
•   Taxable Benefits
•   GST




                            26
       Tax for Tough Times
• “Commercial Debt Obligation” – non-
  interest bearing shareholder advances –
  Genex Communications Inc. v. the Queen
  2009 TCC 583
• ABILS in the family business – Charran v.
  the Queen 2010 TCC 201



                                          27
          Tax for Tough Times
• Fairness Relief – Spence v.
  CRA 2010 FC 52
• CRA opposing discharge
  from bankruptcy - Re Nagy
  2010 SKQB 124
• Director seeking contribution
  – Adams v. Anderson 2010
  ONSC 1999

                                  28
            Directors’ Liability
• Can a director challenge the underlying
  corporate assessment?
     • Barry v. the Queen 2009 TCC 508
• Ontario Retail Sales Tax liability confirmed
     • Danso-Coffey v. Ontario 2010 On. CA 171




                                           29
           Taxable Benefits
• Spate of recent cases on parking as a taxable
  benefit
     • Long v. the Queen 2010 TCC 153
     • Toronto Parking Authority v. MNR 2010
       TCC 193




                                            30
      GST (and comic relief)
• Validity of ITC registration number –
  Comtronic Computer Inc. v. the Queen
  2010 TCC 55
• Tax overpaid in error – 501638 NB Ltd. v.
  the Queen 2010 TCC 167




                                              31

				
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