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Non-Residents’ Taxation – Sale of Canadian Timber

There are at least three common situations that a non-resident of Canada should be aware of if they receive proceeds from Canada. The most common is receipt by a non-resident of income such as interest, dividends, rents and royalties from a Canadian source. A second situation is employment of a foreign resident by a Canadian company. The other situation relates to sales of property, and is the topic of this article, where the property is a timber resource property. The Income Tax Act, Section 13(21), defines a “timber resource property” as “a right or licence to cut or remove timber from a limit or area in Canada.” In other words, payment of stumpage to a non-resident is the purchase of a timber resource property.

Section 116 of the Canadian Income Tax Act requires a purchaser to withhold income taxes when certain property is bought from a non-resident of Canada. One example is a timber resource property (stumpage) that may be purchased from an American resident, or a resident of some other country. The procedure for this tax withholding is explained below. Keep in mind that we are discussing only timber purchases; similar rules apply for other properties, although the reporting requirements may differ. In addition, we are assuming purchase of property from a non-resident who is not using that property in a business; that is, it is property held by an individual for personal use.

The non-resident person disposing of the property must send a notice to the Canada Revenue Agency (CRA) before or within 10 days after the sale. Form T2062 is used for sale of real property but form T2062A is used for timber resources. You may instead write a letter to CRA providing the same details. The non-resident must pay a specified amount, which is currently 25% of the gain on the sale. Alternatively, security satisfactory to CRA may be pledged to ensure payment is made at a later date. After these requirements are met, CRA will issue a certificate of compliance to protect the parties from future tax liability.

A special rule to reduce the capital gain is available to U.S. residents who owned property on September 26, 1980.

If security will be pledged in lieu of payment, or if the calculations of the payment are not certain, form T2062A should be filed at least 30 days before the sale to give CRA enough time to verify that the security or payment is adequate.

If the non-resident vendor fails to comply with this requirement or if the proceeds set out in the certificate are less than the actual proceeds, the purchaser will be held liable on behalf of the non-resident, in which case the purchaser may withhold and remit 25% of the purchase price.

Vendors of taxable Canadian property are required to file a Canadian tax return, for which CRA guide #5013-G, General Income Tax and Benefit Guide for Non-Residents and Deemed Residents of Canada may be useful reading. For more details, refer to CRA Information Circular IC-72-17R5 and Interpretation Bulletin IT-173R2.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum