What is a Compliance Certificate?
Compliance certificates under s.116 of the Income Tax Act are now required to ensure that non-resident Canadian beneficiaries do not owe Canada any taxes.
According to s.248(1)(i) of the Income Tax Act ““taxable Canadian property” of a taxpayer at any time in a taxation year [includes] a property of the taxpayer that is an income interest in a trust resident in Canada.”
When is it Needed?
When a Canadian resident trust distributes property and funds to a non-resident beneficiary, s.116 of the Income Tax Act applies. The application of s.116 is triggered whether the disposition is a full or partial disposition of that beneficiary’s interest, for a “disposition” includes a transfer of property that is part of a taxpayer’s capital interest in a trust (s.248(1)).
General rule: if a non-resident Canadian proposes to dispose of taxable Canadian property, other than excluded property, a certificate is required.
Since the 2010 federal budget, taxable Canadian property was amended to exclude interests in trusts resident in Canada that do not derive their value, at the time, or within the previous 60 months, principally (>50%) from real or immovable property situated in Canada.
If it is not taxable Canadian property (i.e. the value of the estate/trust does not pertain “principally” to real estate), s.116 does not apply. Principally means more than 50% of the value is derived from real estate.
S.116 Procedures
An estate trustee must file a notice under s.116(3) – CRA form T2062 – Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of
Taxable Canadian Property if the taxable Canadian property is not treaty protected. Form T2062C is required if the beneficiary of the property is related to the estate/trust. Then, 25% of the trust property disposed will be withheld at source until the Compliance Certificate is received.
If assets other than cash are distributed to a non-resident beneficiary, there may be a capital gain realized by the non-resident beneficiary. In such cases, 25% of the trust property is withheld until a Certificate of Compliance has been obtained for the non-resident beneficiary. This holdback is used to pay the taxes to obtain the certificate. As a general rule, taxes are usually paid to the Canada Revenue Agency prior to distribution.
If there is no inherent gain in the trust property that is distributed, then there should be no tax eligible under s.116. Nevertheless, the Canada Revenue Agency still requires that beneficiaries provide them with notice of the disposition, and the trustees are potentially liable for the withheld amount, as well as any interest and penalties. In such circumstances, the Certificate of Compliance that will be issued pursuant to s.116 will confirm that no tax is payable on the disposition.
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