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In a purchase of shares of a private corporation, care must be taken
to determine the residence status of the vendor. If the vendor is a
non-resident and the shares are taxable Canadian property (TCP), the
purchaser could be liable for tax. The burden is on the purchaser to
ensure that the vendor (from whom it may be difficult to collect tax)
does not avoid payment of taxes due on sale. The circumstances in which
the purchaser is liable have generally become more restrictive as a
result of a CRA policy requiring the use of the gross value method for
dispositions after 2012.
When a non-resident disposes of TCP (except for excluded property),
the non-resident person is required under subsection 116(1) or 116(3) to
complete form T2062 ("Request by a Non-Resident of Canada for a
Certificate of Compliance Related to the Disposition of Taxable Canadian
Property") either before the non-resident disposes of the property or
within 10 days after the disposition. Following this filing and the
payment of the appropriate amount, the CRA will issue a clearance
certificate pursuant to subsection 116(2) or 116(4). The appropriate
amount is 25 percent of the proceeds (or a lesser amount stipulated in
the clearance certificate). This amount or acceptable security is due
immediately following the sale.
Purchasers can be held liable for withholding taxes not paid on the
disposition of the TCP unless the purchaser (1) had no reason to believe
that the vendor was a non-resident, or (2) has received a copy of the
clearance certificate issued to the vendor. Pursuant to subsection
116(5) of the Act, the purchaser's liability is the amount that should
have been paid by the non-resident vendor. The clearance certificate is
the purchaser's guarantee that this amount has already been paid.
Thus, the key question is whether the shares are TCP as defined in
subsection 248(1). Since March 4, 2010, shares of the capital stock of a
corporation that is not listed on a designated stock exchange (such as
shares of a private corporation) are TCP if, at any time during the
60-month period before the disposition, more than 50 percent of the FMV
of the shares was derived directly or indirectly from real or immovable
property situated in Canada, Canadian resource property, timber resource
property, or options on or interests in any of these properties (or
from any combination of these properties).
At a CRA and Revenu Québec round table published in the Canadian Tax
Foundation's 2011 Conference Report, the CRA stated that the gross asset
value method should be used in respect of all property dispositions
(both for tax treaty purposes and for the purposes of the definition of
"taxable Canadian property" in the Act) for all dispositions after 2012.
Thus, the determination of whether a share of a company derives its
value principally from real or immovable property situated in Canada
should be made by reference to the value of the properties of the
company without taking into account its debts or other liabilities.
For a highly leveraged company, the answer to the question whether
the shares are TCP can differ significantly if a valuation method other
than the gross asset value method is used. Assume, for example, that a
company has land with an FMV of $500,000, other assets of $10 million,
and liabilities of $9.8 million. If the gross asset value method is
used, the land constitutes 5 percent of the total value of the shares.
If a net asset value method is used, the land value exceeds 50 percent
of the FMV of the shares, and the shares are TCP.
MNP LLP, Winnipeg