In this case study, we outline the potential implications and options for Numbered Co. 1, which is an incorporated Ontario company and selling real property in Ontario, with unconfirmed information if the principal of the company is a resident of Ontario or a non-resident. This may have tax implications which may result in the purchaser requesting a holdback of the sale proceeds.
Generally, when a non-resident of Canada disposes of real property s. 116 of the Income Tax Act (“ITA”) can be triggered. This section requires, among other things, a non-resident selling real property to notify Canada Revenue Agency (“CRA”) of the sale and details of the sale. Canada Revenue Agency should be notified prior to the disposition, but a seller must notify the CRA of the sale no more than 10 days after closing. Failure to notify CRA can result in the seller being fined up to $2,500. Once CRA receives and processes the request for a Certificate of Compliance, CRA will advise the seller of the amount of tax to be paid. Once payment is received, CRA will issue a Certificate of Compliance. If a Certificate of Compliance has not been issued, the buyer is liable to pay between 25 – 50% of the purchase price to CRA on behalf of the seller within 30 days after the end of the month in which the property is acquired. The buyer is entitled to holdback this amount from the purchase price for the purpose of making this payment.
Normally, if the sale proceeds are going to the Ontario corporation, there would not be any s. 116 tax implications.
In July, 2021, the requirement that an Ontario corporation have at least 25% of its directors be residents of Canada (or, if less than 4 directors, at least one director needed to be a resident of Canada) was absolved. This means that as of July 5, 2021, an Ontario corporation no longer needed any of its directors to be residents of Canada. In this case study, if Numbered Co. 1 did not update their corporate information to reflect the principals change in residency, it may not matter for this sale. Further, if any of Numbered Co. 1 by-laws included a residency requirement, and such requirement is still in effect, the residency changes that were absolved, discussed above, would not apply.
If there are no by-laws extending the residency requirement, section 250(4) of the ITA would apply. This section provides that a corporation incorporated in Canada is deemed to be a resident of Canada for income tax purposes. This should end the inquiry at this point.
However, given the principals residency in USA and under the assumption that they are the controlling mind of Numbered Co. 1, we also considered the outcome should the tax treaty between USA and Canada apply. Under the treaty, there are several factors to consider, including where the controlling mind of the corporation operates and where the business is located. The answer to the first inquiry is USA, while the answer to the second is in Canada. As there are factors making the corporation resident in both USA and Canada, the tax treaty tie-breaker rules would come into effect. The tie-breaker rule is to look where the corporation was incorporated. In this case, Numbered Co. 1 was incorporated in Canada. This would make it a resident of Canada for income tax purposes. As such, s. 116 would not apply.
A last consideration was that the principal owner, as a non-resident carrying on business in Canada, will be required to submit an income tax return reporting the disposition of this sale in Canada.
Researched and written by Sarah M. Marshall
Associate Lawyer at Carson Law Office Professional Corporation
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