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.
Capital Distributions (Taxable Canadian Property)
Another potential source of liability for estates with non-resident beneficiaries arises where the estate has Canadian real property.
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”).
Under the TCP rules, the estate is required to report the disposition of real property to the CRA within 10 days of the sale. By virtue of the non-resident beneficiary’s interest in an estate, the tax rules treat the non-resident beneficiary as a vendor that 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)
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. The form calculates the net gain and multiplies it by 25%, which determines the tax liability of the non-resident which must be remitted to the CRA. If it turns out that the sale of real property results in a net loss, the form should still be filed with the CRA but there would be no tax to remit.
It is also important to note that a purchaser buying real estate from a non-resident also has potential compliance requirements with the CRA. They are required to withhold and remit 25% of the purchase price to the CRA, within 30 days after the end of the month in which the purchaser acquired the property, unless the non-resident seller submitted Form T2062, and together with the purchaser, been issued a Certificate of Compliance Form T2068 from the CRA, which confirms payment/security of the non-resident’s tax liability.
Since a remittance amount calculated at 25% of the purchase price would be significantly higher than 25% of the net gain, it is in the non-resident seller’s best interest to file Form T2062 along with the withholding payment as soon as the transaction happens.
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.
C A T E G O R I E S
P O P U L A R P O S T S