Distributions to Non-Resident Beneficiaries
The need to consult and retain the services of professional Accountants in order to assist throughout the administration of an estate and the trusts created thereby is ever apparent in cases involving beneficiaries who are non-residents of Canada.Most estate solicitors are strong advocates of the importance of involving competent accounting support in order to shield their Trustee and Executor clients from potential liability vis-à-vis the beneficiaries as well as the taxing authority. The following presents a cursory review of some of the Tax implications concerning distributions of both income and capital made to non-resident beneficiaries.
Unlike distributions of income to a resident Canadian beneficiary which income is taxable to the recipient beneficiary, distributions made to non Canadian residents are subject to withholding tax. Specifically, the Income Tax Act (hereinafter the “ITA“) requires that a trustee withhold tax equivalent to 25% of the distribution to be made, subject only to the exception of withholding less in the instance that the recipient beneficiary resides in a country which is party to a tax treaty with Canada.
Despite recent amendments to the ITA which, effective January 1, 2008, eliminate withholding tax on payments of interest to all arm’s length non-residents of Canada, such payments made to non-arm’s length parties as well as other types of payments, such as dividends and trust distributions, continue to be subject to the applicable withholding tax. As well, unlike other tax liability, payment of the withholding tax becomes immediately due and owing to the Canada Revenue Agency which must receive payment by the fifteenth day of the subsequent month following payment of the income to the non-resident beneficiary.
Whereas Canadian resident beneficiaries can avail themselves of the rollover rules in order that appreciated capital property can be transferred to a beneficiary at its original cost base, thus avoiding realization of a taxable gain, similar rollover rules do not apply to non-resident Canadians. Accordingly, distributions of a capital nature to non-resident beneficiaries are subject to tax based on the accrued capital gain at time of distribution and the property distributed is furthermore deemed by the ITA to have been disposed of for fair market value. There are exceptions to this general rule, however, such as in the case of real property which can be rolled over to non-resident beneficiaries.
One final matter worth noting with respect to making capital distributions to non-resident beneficiaries regards the importance of satisfying the requirement of obtaining the necessary section 116 certificate (The same certificate required when acquiring real property in Canada from a non-resident). The section 116 certificate is required because the non-resident beneficiary is deemed by the ITA to have disposed of a capital interest which the ITA correspondingly deems the trust to have acquired. As such, Canadian executors/trustees are required to either withhold and remit to Revenue Canada the applicable tax (currently 25%) or obtain the section 116 certificate which the recipient beneficiary must apply for, failing which, penalties and interest will apply for which the executor/trustee will be liable.
Disclaimer: This article provides general information only and is not intended, nor is it to be relied upon as a substitute to obtaining legal advice.