Principal Issues: (1) In a transfer between parties that are not related persons, in order for the property transferred to qualify as "excluded property" pursuant to paragraph 116(6)(i) of the Act, does the notice described in subsection 116(5.02) have to be filed if the property is "treaty-protected property" as that term is defined in subsection 248(1)? (2) Is the requirement to file a notification under subsection 116(5.02) only applicable to a transfer of property by a non-resident vendor to a related person?
Position: (1) No. (2) In certain circumstances the filing of a subsection 116(5.02) notice may be beneficial to a purchaser in the case of an arm's length transfer.
Reasons: (1) The provisions of 116(6.1) and 116(6)(i). (2) If the purchaser fails to notify the CRA in the manner set out in subsection 116(5.02), that he acquired property from a non-resident and it turns out the property was not treaty-protected property the purchaser will not benefit from the safe-harbour provision of subsection 116(5.01) in paragraph 116(5)(a.1) and 116(5.3)(a).
XXXXXXXXXX 2008-028905 Shelley Lewis (613) 957-2118
January 4, 2011
Dear XXXXXXXXXX ,
Re: Section 116 and Treaty-Protected Property
We are responding to your letter wherein you inquired whether there were circumstances where the notice described in subsection 116(5.02) of the Act should be sent by a purchaser who acquires a property that it considers to be treaty-protected property from a vendor to whom the purchaser is not related.
Your view
It is your view that in the event that the purchaser and the non-resident vendor are not "related persons" as defined in subsection 251(2) under the Act, and the property transferred is "treaty-protected property" as defined in subsection 248(1) of the Act, such property will be "treaty-exempt property" pursuant to subsection 116(6.1) of the Act and will be "excluded property" pursuant to paragraph 116(6)(i) of the Act even if the purchaser does not provide notice under subsection 116(5.02). Therefore, it is your view that under subsections 116(5) and 116(5.3), when a purchaser acquires a property from an unrelated non-resident vendor that purchaser's liability is excepted if the property is "excluded property" and nothing is gained by filing the notice described in subsection 116(5.02) of the Act.
Our Comments
We agree with your view that subsections 116(5) and 116(5.3) of the Act do not apply to a transfer of excluded property. However, it may be beneficial to a purchaser to file the notice described in subsection 116(5.02) of the Act even if the purchaser believes at the time of the purchase that the vendor qualifies for treaty relief in respect of any Part I taxes arising in respect of the transfer. For, example there may be circumstances where the conditions described in paragraphs 116(5.01)(a) and (b) of the Act are satisfied, but on subsequent audit it is determined that the vendor does not qualify for relief from Part I tax under a tax treaty after all. In such case, if the purchaser has filed the notice described in subsection 116(5.02) of the Act, all the requirements of subsection 116(5.01) will have been met, and no liability in respect of withholdings will lie with the purchaser by virtue of the excepting provisions in paragraphs 116(5)(a.1) and 116(5.3)(a) of the Act.
We trust these comments are of assistance.
Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch