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Clearance Certificate Process Updates to Note


The Canada Revenue Agency has released updated an Information Circular dated 29 September 2011, which replaced the March 2005 version. The revised circular reflects legislative changes to section 116 and the definition of "taxable Canadian property" that have been enacted over the past several years, and addresses issues relating to section 116 compliance for fiscally transparent entities. In particular, the circular addresses the application of the hybrid entity clause in Article IV(6) of the Canada-U.S Tax Convention and compliance procedures for partnerships.The circular also explains how the recently introduced "Declaration of Eligibility" forms NR301, NR302 and NR303 are integrated into the section 116 compliance process. Taxand Canada summarises the changes contained in the revised circular.

Treaty-Exempt and Treaty-Protected Property
Numerous articles have discussed the amendments in section 116 that introduced the concepts of "treaty-protected property" and "treaty-exempt property." To summarise, section 116 compliance and withholding obligations do not apply to "excluded property", the definition of which includes "treaty-exempt property". To be "treaty-exempt property", the property must qualify as "treaty-protected property", and where the purchaser and vendor are related at the time of the disposition, the purchaser must give notice under subsection 116(5.02) to the CRA within 30 days after the date of the acquisition of the property.

Treaty Exemptions
The circular has been revised to reflect that section 116 vendor notification and clearance certificate requirements are no longer required in respect of treaty-protected property (unless, as noted above, the purchaser and vendor are related and the purchaser fails to timely file a subsection 116(5.02) notice). Where the vendor requests a clearance certificate and makes a claim under a tax treaty, the circular now indicates that the vendor should include forms NR301, NR302 and/or NR303, as applicable, or equivalent information, to establish its claim for the tax treaty benefit.

Taxand Canada provides a more in depth look at this issue

Taxand's Take

The circular also states that a hybrid entity that has elected to be taxed as a corporation on its world income (in its own country) would claim a treaty based exemption on its own entitlement to tax treaty benefits, and not that of its members/shareholders. This differs from the choice afforded to partnerships to claim treaty benefits on their own behalf or on that of their members, as noted above. Multinationals affected by these changes would be prudent to ensure that they are compliant with the new legislation.

Your Taxand contact for further queries is:
Jennifer Hanna
T. + 1 403 298 1892

Taxand's Take Author