Change re Canadian taxation of non-residents' capital gains

[Michael I. Atlas, CA]

I thought that some of my fellow contributors as well as other visitors to this forum might be interested in a very important development resulting from the Canadian Federal Budget that was tabled on March 4.
Prior to the Budget, all shares of corporations that are resident in Canada (other than those listed on a designated stock exchange) were classified as “taxable Canadian property” (“TCP”).
The significance of being TCP is that under our domestic law, gains from the disposition of TCP that are realized by non-residents will be subject to Canadian tax, and such disposition will be subject to tax clearance and withholding requirements.
Although in many cases provisions in tax treaties with Canada resulted in the gain being exempt from Canadian tax, many non-residents are not residents in countries that have a tax treaty that provides such protection, and furthermore, in many cases the tax clearance and withholding requirements would still apply.
As a result of the changes announced last Thursday, shares of private Canadian-resident corporations will now be TCP at any particular time only where more than 50% of the value of the assets of the corporation is attributable to interests in Canadian real estate (or property closely akin to that, such as resource properties or timber limits). Shares in ordinary operating companies will generally not be TCP after this change.
This will bring Canada’s system for taxing non-residents on capital gains realized by non-residents more in line with international norms, and make it fairly similar to the US “FIRPTA” regime under which only i “US Real Property Interests” are taxable in the hands of non-residents.
This is particularly welcome, given that it is coming at a time when there is a great deal of interest by non-residents regarding investing in Canada, given our stable banking system and economy, and abundant natural resources.
If anyone would like any additional information regarding these changes, please feel free to contact me.

[Michael I. Atlas, CA]

Correction/addition re one point-the 50% test is based on the prior 60 months, so if at any time in the prior 60 months, the 50% threshold is exceeded, the shares will be TCP.

[markjaacobs470]

I am a naturalised Canadian citizen who became non-resdident for tax purposes in July 3, 1996. I have a letter from the CRA that certifies this.
I am now a permanent resident of NZ and I am also tax resident there. I have an RRSP with C$60000 which I have not contributed to since I became non-resident for tax purposes in Canada in 1996. I also have an IRA in the USA with about US$80000. I am 53 years of age now.

Can I set up a self-directed RRSP in Canada to (i) form a Canadian Controlled Private Corporation that is wholly owned by the RRSP trust and (ii) own a mortgage as a qualified investment? If so could the property in Canada that is a consequence of the mortgage be titled in the name of the RRSP trustee rather than my name? (iii) does it make sense for Canadians who are non-resident for tax purposes to do this or does this only make sense for those who are resident in Canada for tax purposes?

I named my mother as my beneficiary on my RRSP with RBC. She is also my beneficiary with my IRA.

If something happens to me will my estate in Canada be deemed to have collapsed my RRSP and become liable for Canadian capital gains tax on my death? Is it true that if I named a beneficiary, in this case my mother, the proceeds of my RRSP will be transferred to another RRSP in her name and any taxes will be deferred until she decides to withdraw it? If this is true how should I set up my will to ensure that this happens?

What about my IRA? Is it true that I will incur early withdrawal penalties from the IRS if I cash it out before the age of 70 and half? What penalties are these and what is the percentage rate that will be charged? If something happens to me will my estate be charged inheritance tax? Is the exemption limit $3,500,000? If so will the $80000 be exempt from that? If the IRA provider pays out the full amount to my beneficiary who is a non-resident alien for income tax purposes in the USA will she be liable for income tax in the year that it is paid out to her? If so could this be avoided by instructing the IRA provider to transfer the proceeds to an IRA in her name so that she can defer taxation to a future date? If this will not work please suggest a better way.

Thank you for your kindness

Mark Jacobs

[Michael I. Atlas, CA]

Lots of questions!

I do not know why you would want to set-up a new RRSP as a non-resident, unless you are just envisioning transferring the existing one to it-certainly you would not want to make any additional contributions.
The CCPC shares would not be a “qualified investment” for the RRSP-forget it! A mortgage can be a qualified investment for RRSP-generally has to be either an arm’s length mortgage on Canadian real estate or an insured one. The RRSP would be named as the mortagee.
If you die holding the RRSP, it is not a capital gain-it is subject to non-resident withholding tax at 25%. You cannot avoid that by making your mother a named beneficiary or having it transferred to her RRSP. That would only work with a spouse.
The early withdrawal penalty for an IRA is 10%, but the age is 59 ½ not 70 1/2 .
The US estate tax is in limbo-there is none this year, and it is supposed to be reinstated next year with $1 million exemption-however, likely will be restored retroactive to this year with $3.5 million. However, in the absence of a treaty, exemption for non-resident aliens in just $60K.
If you beneficiary is a Canadian resident, the IRA proceeds will be taxable in Canada for sure, with foreign tax credit for US taxes if any. If US will allow rollover to IRA, that will also work for Canada.

[markjaacobs470]

Hi,

"If US will allow rollover to IRA, that will also work for Canada."

I am a non-resident alien for tax purposes in the USA and non-resdident in canada for tax purposes. So is my beneficiary that I nominated in the IRA.

If something happens to me under what conditions will a rollover of my IRA to a new IRA in my beneficiary's name avoid both US estate tax on my IRA and US income tax on my beneficiary on the transfer of the proceeds from my IRA to the new IRA?

Thanks again!

Mark Jacobs

[Michael I. Atlas, CA]

I will leave it to someone more knowledgeable about U.S. tax laws than I am to answer that.