A non-resident of Canada is subject to Canadian taxation on gains arising from the disposition of taxable Canadian property (“TCP”). TCP includes many items but the most common one we see in practice is Canadian real estate. Many non-residents selling Canadian real property often discover the purchaser is withholding 25% of the gross proceeds pending receipt of a “compliance certificate” from the non-resident. In some cases, the withholding is 50%. Our discussion today focuses on a non-resident’s reporting and withholding tax requirements under section 116 of the Income Tax Act (the “Act”) upon the sale of TCP and more importantly, how to reduce the withholding tax amounts.
It is not uncommon for the sale price of a business to be partially based on future events. In these cases, an earnout is often used as a mechanism to determine a portion of the sale price based on achieving certain results for a period of time after closing of the sale. For example, the parties may agree to an initial sale price of $5,000,000, with an additional $100,000 per year in any of the subsequent 5 years, if revenues increase by at least 5% in the year. To keep things “simple” we will assume shares, not assets, are being sold.
Occasionally, a taxpayer moves from his/her principal home into a new home and rents the old home out, or converts part of the home for a different purpose. Alternatively, he/she may move into one of his/her rental properties and turns it into a principal home. While this may not be an issue if the change is short term and temporary, a permanent change could give rise to a deemed disposition of the property for tax purposes. If not carefully managed, this deemed disposition can create undesirable results for these taxpayers.