A recently published (but a year or so old) ruling letter from the CRA deals with the donation of land in Canada by a non-resident where to avoid the capital gains tax, an election was made under under subsection 118.1(6) .[1] This provision allows a donor to elect to make the gift at its “tax cost” and thus eliminate potential capital gains taxes.
`This is a very useful technique for non-residents who cannot benefit form tax breaks available to Canadian residents.
The letter answers what we might call a subsidiary issue namely whether a non-resident individual who donates undeveloped land located in Canada to a prescribed donee, within the meaning of that term as set out in section 3504 of the Income Tax Regulations, or to a registered charity, within the meaning of that term as used in the definition of “qualified donee” in subsection 149.1(1) of the Income Tax Act, would be required to file a Canadian tax return if they designate an amount under subsection 118.1(6) in respect of the resulting disposition, such that no Part I tax is payable in Canada by the non-resident.
“Under subsection 116(1) and/or subsection 116(3) of the Act, every non-resident person who disposes of taxable Canadian property (“TCP”) must, unless the property is described in subsection 116(5.2) or is “excluded property” as defined in subsection 116(6), notify the Canada Revenue Agency (“CRA”) of the disposition, and provide certain prescribed information by no later than 10 days after the disposition. Undeveloped land situated in Canada meets paragraph (a) of the definition of “taxable Canadian property” in subsection 248(1), and is not property described in subsection 116(5.2) or “excluded property” as defined in subsection 116(6) of the Act.
For purposes of the notification and information required under subsection 116(1), subsection 116(5.1) provides that when a non-resident person disposes of TCP by way of gift inter vivos or to a person with whom the non-resident person was not dealing at arm’s length for no proceeds of disposition, or for proceeds of disposition less than the fair market value of the property at the time the non-resident disposes of it, the proceeds of disposition means the fair market value of the property immediately before the disposition.
Where the non-resident individual intends to make a designation under subsection 118.1(6) in respect of the disposition of taxable Canadian property, in addition to filing Form T2062 with the CRA in accordance with subsection 116(1), the individual should provide a statement indicating the intention to make a designation under subsection 118.1(6) in the year of disposition stating the amount to be so designated, together with a letter from the charity or prescribed donee confirming an undertaking that the property is to be donated by the non-resident.
Further to this process, the CRA will issue a T2064, Certificate – Proposed Disposition of Property by a Non-Resident of Canada (“Certificate of Compliance”) to the non-resident where the conditions of subsection 116(1) are met, and where the required payment on account of tax or acceptable security is provided. In circumstances such as you have described, where no Part I tax would be assessed as a result of the taxpayer’s subsection 118.1(6) designation, no payment or security would be required.
In your letter, you referred to paragraph 59 of Information Circular IC72-17R6, Procedures concerning the disposition of taxable Canadian property by non‑residents of Canada – Section 116, which states that a non-resident vendor may not be obligated to file a Canadian tax return where certain criteria are satisfied, one of which is that the non-resident has no Part I tax payable for the year. You have asked whether this relief would be available in the circumstances described, where the amount of Part I tax payable is contingent on the designation of an amount pursuant to subsection 118.1(6) in the non-resident’s tax return for the year of the disposition. In this regard, it is important to note that the supporting information provided to the CRA by a non-resident individual in conjunction with the T2062 filing process does not eliminate the non-resident individual’s obligation to in fact make the designation under subsection 118.1(6). Such designation can only be made by attaching it to a return of income filed by the taxpayer for the year in which the disposition is made. In this respect, in the absence of the designation, subparagraph 69(1)(b)(ii) of the Act would apply to deem the proceeds of disposition of the property to the non-resident individual to be equal to the fair market value of the property for the purpose of computing the taxpayer’s taxable capital gain.
Therefore, in situations where the amount of Part I tax resulting from the disposition of TCP by a non-resident individual is dependent upon an amount designated by the individual in a tax return for the year of the gift pursuant to subsection 118.1(6), the individual is required to produce a tax return in order to support intention that was indicated in the taxpayer’s Form T2062. In the absence of a duly-filed designation resulting in no Part I tax payable by the non-resident individual, such tax would be otherwise assessed in respect of the disposition of property. “
A long winded way of saying “yes”. But this letter will be a great use to those soliciting donations of property from abroad.
[1] 2013-0496461E5