Section 116 and Sale of TCP by the Estate of a Non-resident

  • April 05, 2021
  • Birute Luksenaite, founder, Portfolio Estate Law

More and more estates nowadays estates fall into the realm of “international estates”, defined broadly to include estates that have interests in property situated in multiple jurisdictions, estates that are managed by foreign-resident executors and trustees, and estates whose beneficiaries reside in multiple jurisdictions. In the Canadian context, increasing numbers of non-residents die owning Canadian real estate; however, the tax ramifications of such international estates are not always clear to those who have to attend to their administration. 

In a recent transaction that involved the sale of an Ontario cottage of a US-resident deceased individual, the attending real estate lawyers for the non-resident’s estate and for the Canadian buyer had trouble agreeing on whether the Canadian income tax rules that apply to non-residents’ dispositions of real estate applied.

In broad terms, Canada’s ambit for taxing non-residents is generally limited to non-residents’ Canadian-source income and gains on taxable Canadian property (“TCP”), which is defined in section 248 of Canada’s Income Tax Act, R.S.C., 1985, c. 1(5th Supp.) (the “ITA”) to include Canadian-situated real estate. 

When a non-resident actually disposes of TCP, section 116 of the ITA provides that the non-resident will either pay or provide security for, to the Canada Revenue Agency (the “CRA”), 25% of the capital gain (sale proceeds less adjusted cost base) on such TCP at the time of the sale or, pursuant to subsection 116(5), have the buyer make a withholding of 25% of the gross sale proceeds of the TCP as a prepayment of the non-resident’s highest potential Canadian tax liability on the applicable capital gain. If neither is done, the buyer may continue to bear personal liability for such remittance, any related penalties and interest.