Scott Park, CPA, CA
When there is a Canadian estate and all of the beneficiaries are residents of Canada, the administration and settlement of that estate is generally straightforward. However, when there is a non-resident beneficiary (e.g. someone that lives in the US), this creates additional tax issues for the executor to deal with.
Types of Distributions
The distributions from an estate are either from income earned by the estate or from capital property.
The Income Tax Act (“ITA”), imposes Canadian income tax of 25% on the gross income distributed to non-residents of Canada, unless a tax treaty provides for a lower tax rate. This means that the estate, administered by the executor, is responsible for remitting the withholding tax to the CRA before the 15th day of the following month after the income is distributed to the non-resident beneficiary. The executor must complete NR4 Summary and Supplementary slips to report the income paid or credited to the non-resident beneficiaries and remit the tax withheld. Withholding tax on interest income paid to an "arms length" non-resident was eliminated as of January 1, 2008. However, interest paid to a "non-arms length" non-resident (i.e. related person) would still be subject to the withholding tax.
Capital Distributions (Taxable Canadian Property)
Under Canadian tax rules, there is generally no rollover on a distribution of capital property by an estate to a non-resident beneficiary. The estate will be deemed to have disposed of the property at proceeds equal to fair market value and the non-resident beneficiary acquires the capital property at that amount. There may be capital gains to be reported by the estate. But the non-resident beneficiary is deemed to have disposed of the capital interest for proceeds equal to its cost amount, thus no tax liability for the non-resident beneficiary.
However, non-resident beneficiaries can still transfer Canadian real property on a roll-over basis since this type of property would remain subject to the Canadian tax rules. Also, a non-resident beneficiary is considered to be disposing of their interest in a Canadian estate in return for a cash distribution, which is not considered a taxable gain, and likewise not subject to income tax, but may have to be reported to the CRA.
A non-resident beneficiary’s interest in a Canadian estate may derive more than 50% of its value from Canadian real property. If this applies, section 116 of the ITA considers the interest in the estate to be “taxable Canadian property” (“TCP”). The TCP rules imposes an obligation to obtain a clearance certificate on a non-resident person who disposes of certain taxable Canadian property. The obligation will apply to a non-resident with respect to a disposition of a capital interest in an estate that occurs because of a distribution of capital by the estate to the non-resident. By virtue of the non-resident beneficiary’s interest in an estate, under s.116, the estate is considered the "purchaser" of taxable Canadian property (i.e. the capital interest in the estate) and the non-resident beneficiary is considered the "vendor". The non-resident beneficiary must report the disposition on Form T2062, Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property.
Certificate of Compliance (Form T2062)
If a non-resident of Canada receives a distribution from a Canadian estate and more than 50% of the FMV of the estate came from Canadian real property, then the estate is required to report that distribution to the CRA within 10 days of making the distribution. The non-resident seller must complete Form T2062 and send it by registered mail to the CRA along with all the necessary supporting documents. Each non-resident seller must file a separate Form T2062 to reflect their portion of the transaction. This is necessary as the ITA assumes a deemed disposition of the capital interest of the estate by the non-resident beneficiary and a deemed acquisition of the interest by the estate. The Canadian executor is required to either withhold and remit 25% of the gross distribution to the CRA or obtain the clearance certificate. Therefore, to eliminate the requirement to withhold 25% of the gross amount distributed to the non-resident, Form T2062 should be filed with the CRA.
Failure to file or submit the T2062 on time (within 10 days of the disposition of TCP) to the CRA would be subject to a penalty of $25 per day. There is a minimum penalty of $100 and a maximum penalty of $2,500.
Tip: It is recommended that an executor should engage a lawyer and an accountant especially when there are non-resident beneficiaries of an estate.
Disclaimer: The blogs posted on Scott Park & Co Inc. website provide information of a general nature. These blog posts should not be considered specific advice since each person's personal financial situation is unique and fact specific. Please contact us prior to implementing or acting upon any of the information contained in one of our blogs. Scott Park & Co Inc. cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.
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