CAPITAL GAINS

RULES UNDER THE INCOME TAX ACT

General Rules

In general, non-residents of Canada are subject to Canadian tax on capital gains from the disposition of "taxable Canadian property". As is the case with Canadian residents only 50% of capital gains are taxable ("taxable capital gains") and this amount (net of "allowable capital losses") is included in income and taxable under Part I of the Act.

This treatment can apply to deemed capital gains, as well as actual realized capital gains, such as those resulting from a gift of the property or the death of the owner of the property.

Taxable Canadian Property ("TCP")

The most commonly encountered forms of TCP are as follows:

• Interests in real property situated in Canada,
• Shares in corporations resident in Canada that are not listed on a prescribed stock exchange,
• Capital interests in trusts resident in Canada,
• Shares in corporations resident in Canada that are listed on a prescribed stock exchange, where the particular non-resident (together with persons not dealing at arm's length) owned 25% or more of any class at any time in the previous 5 years,
• Property used in carrying on a business in Canada, and
• Interests in partnerships where more than 50% of the fair market value of the partnership's property consists of TCP and/or other specified forms of property

Withholding And Clearance Requirements

In most cases, a person who acquires TCP from a non-resident is obliged to remit tax (of either 25% or 50%) of the purchase price unless a tax clearance has been obtained by that non-resident from the Canada Customs and Revenue Agency.

In order to obtain such tax clearance, the non-residence will generally have to pay, or post security for, 25% of any capital gain realized, as well as an estimate of the tax applicable to any recaptured capital cost allowance.

If the amount of tax paid to get the clearance (or tax remitted by the purchaser) exceeds the actual tax liability, a refund for the excess may be obtained by filing a Canadian tax return.

RULES UNDER CANADA'S TAX TREATIES

The usual pattern under Canada's tax treaties is that Canada may tax non-residents on gains from the disposition of direct and indirect interests in real property situated in Canada (including interests in corporations, partnerships or trusts that derive most of their value from Canadian real property).

In addition, Canada is normally permitted to tax gains on other property forming part of a permanent establishment or fixed base of a business carried on in Canada.

Furthermore, Canada is normally allowed to tax capital gains on all other types of property owned by former Canadian residents for a specified time period after they cease being Canadian residents (this is discussed under "Emigration From Canada").

Beyond those types of situations, residents of the vast majority of Canada's treaty partners are generally shielded from Canadian tax on capital gains.

However, some significant departures from these general rules are outlined below.