By Brian Brophy, François Champoux, Sandra Slaats, Doug Connell, Andrew McBride and Brad Gordica

The 2008 Canadian budget, released 26 February 2008, includes proposals directed at easing the administrative compliance, withholding and reporting requirements that apply when a nonresident of Canada disposes of property which qualifies as “taxable Canadian property” (TCP).

Deloitte has worked in partnership with venture capital associations in conducting a survey of the global venture capital industry. The survey results highlighted the negative barrier of the existing requirements applicable to Canadian investments by nonresident investors. The budget proposals attempt to address these concerns. While certain aspects require clarification, the budget proposals should be welcomed by nonresident investors involved in both arm’s length and related party transactions. Private equity investors and venture capitalists may benefit the most from the proposals.

Currently, when disposing of TCP, a nonresident of Canada must apply for and obtain a clearance certificate from the Canada Revenue Agency (CRA) and undertake to file a Canadian income tax return to report the disposition. A purchaser is also obligated to withhold and remit an amount from the purchase price if a valid clearance certificate is not provided by a nonresident vendor. This can be a time-consuming and costly process, especially for private equity investors and venture capitalists who have to administer these requirements on behalf of numerous investors.

Effective for dispositions that occur after 2008, the budget will generally eliminate the requirement for a purchaser to withhold and remit tax, and for a nonresident vendor to apply for and obtain a clearance certificate from the CRA, in respect of the disposition of TCP in circumstances where the gain on the disposition is exempt from tax under a tax treaty.

The clearance certificate requirement will be eliminated if treaty protection applies, and in the case of related party purchasers, if a notice setting out the particulars of the transaction is filed within 30 days of the disposition with the CRA.

In addition, all purchasers will be protected from penalties for failing to withhold tax as required from the purchase price provided they have made reasonable efforts to determine that the vendor is a resident of a treaty country, a treaty exemption applies and they file a notice describing the transaction with the CRA within 30 days of the disposition. Therefore, it is likely that the notice will be filed in respect of both related party and unrelated party transactions. In establishing that reasonable efforts have been made, purchasers will likely require nonresident vendors to provide support for their residency and treaty exemption claims. Where an investor is an entity which Canada looks through, such as a partnership, it appears that this information would still be required in respect of each of the underlying partners. If so, then it may be preferable for the investment to be held by an entity that is treated as a single investor entitled to the benefits of an applicable tax treaty.

In addition, the nonresident vendor will no longer be required to file a corporate tax return if no tax is payable for the year or due in respect of any previous year and the gain is treaty-exempt or a clearance certificate has been issued. Where uncertainty exists as to whether a gain is treaty-exempt, a protective Canadian tax return filing may still be advisable.

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