INTERPRETATION AND ADMINISTRATIVE BULLETIN CONCERNING THE LAWS AND REGULATIONS Income Tax IMP. 1097-1/R1 Disposition of Certain Taxable Québec Property Date of publication: January 31, 1995 Reference(s): Taxation Act (R.S.Q., c. I-3), sections 1, 26, 27, 488, 518, 521, 536, 538, 551, 554, 608, 725, 1089, 1094, 1096, 1097, 1098, 1099, 1100, 1101 and 1102 Regulation respecting the Taxation Act (R.R.Q., 1981, c. I-3, r.1, as amended), sections 488R1 and 1089R17 This bulletin cancels and replaces bulletin IMP. 1097-1 of June 29, 1989. This bulletin deals with the consequences of disposing of certain taxable Québec property and the procedures to be followed at the time of their disposition or proposed disposition by an individual not resident in Canada or by a corporation not resident therein that has no establishment in Québec. For questions dealing with the disposition of Québec property referred to in section 1102.1 of the Taxation Act (the Act ), the current version of bulletin IMP. 1102.1-1 should be consulted. APPLICATION OF THE ACT The Meaning of the Expression Taxable Québec Property for the Purposes of Part II of the Act 1. Section 1094 of the Act provides that for the purposes of Part II thereof, taxable Québec property includes an interest in such property and means: (a) an immovable situated in Québec; (b) any capital property used in Québec in carrying on a business other than an insurance business; (b.1) any capital property that is property used or held in Québec by an insurer in the year in carrying on an insurance business in Canada within the meaning of the regulations under section 818 of the Act; (c) a share of the capital stock of a corporation resident in Québec other than a public corporation;
(d) a share of the capital stock of a public corporation resident in Québec, if, at a particular time, after 1971, during the five years preceding the disposition of such share by a person resident outside Canada, at least 25 percent of the issued shares of any class of the capital stock of the corporation belonged to that person, to other persons with whom he was not dealing at arm s length or both to him and to the other persons; (e) an interest in a partnership if, at a particular time during the twelve months preceding the disposition of that interest, the fair market value of the partnership property which then was a Canadian resource property, a timber resource property, an interest in the income of a trust resident in Canada or any other property referred to in this section, was not less than 50% of the aggregate of the fair market value, at that time, of all the property of the partnership and any amount of money that the partnership had on hand at that time; (f) capital interest in a trust resident in Québec which is not a unit trust; (g) a unit of a unit trust resident in Québec which is not a mutual fund trust; (h) a unit of a mutual fund trust resident in Québec if, at a particular time, after 1971, in the five years preceding the disposition thereof by a person, at least 25 percent of the issued units belonged to that person, to other persons with whom he was not dealing at arm s length or both to him and to such other persons; or (i) any other property deemed to be taxable Québec property under this Act. Therefore, for example: i. section 538 of the Act provides, among other things, that where an exchanged share is a taxable Québec property, the share acquired in exchange under the terms of section 536 of the Act is also deemed to be taxable Québec property; ii. section 554 of the Act provides, among other things, that, as part of an amalgamation, where the capital property referred to in section 551 of the Act is a share or a right to acquire such a share which is, to the taxpayer, taxable Québec property, the share or the right received as consideration is deemed to be such property to him; iii. section 521 of the Act provides, among other things, that where property to which section 518 of the Act applies is taxable Québec property, a share referred to therein received as consideration for the disposition thereof is also deemed to be taxable Québec property. 2. Paragraph a of section 1096 of the Act provides that for the purposes of section 1094 of the Act, a taxable Québec property does not include a share of the capital stock of a non-resident owned investment corporation if, on the first day of the taxation year of the corporation in which the disposition of the share was made, such corporation did not own any property that was a Canadian resource property, a timber resource property or an interest in the income of a trust resident in Canada or of any property referred to in the said section 1094.
3. Paragraph b of section 1096 of the Act provides that for the purposes of section 1094 of the Act, a property mentioned in section 1094 of the Act is deemed to include at a particular time an option in respect of such property or, since July 14, 1990, any interest therein, whether or not such property is in existence at that time. Thus, in the case of a share, an interest in property or an option includes, for example, either warrants or any other share purchase rights, or a note or other instrument convertible into one or several shares, and, if it includes an irrevocable offer to purchase a share within a specified period of time, one of these items is considered to be a share option. Meaning of the Expression Taxable Québec Property for the Purposes of Sections 26 and 27 of the Act Exclusively 4. It should be noted, though, that section 1 of the Act provides that the expression taxable Québec property has the meaning assigned to it by Part II of the Act and that for the purposes of sections 26 and 27 of the Act exclusively, it includes: (a) a Québec resource property within the meaning of paragraph d of section 1089 of the Act; (b) a timber resource property situated in Québec, and, starting with taxation year 1990, including at any particular time an interest therein and an option in respect thereof; (c) an income interest in a trust resident in Québec; (d) a right to a share in the income or loss of a partnership having an establishment in Québec under an agreement described in section 608 of the Act; (e) in respect of a disposition of property that occurs after July 13, 1990, a life insurance policy issued or subscribed by an insurer on the life of a person resident in Québec at the time of the issue or subscrip tion. Disposition of Taxable Québec Property by an Individual not Resident in Canada at any Time in a Taxation Year 5. The first paragraph of section 26 of the Act provides, among others, that every individual who was not resident in Canada at any time in a taxation year and who, during the taxation year or a previous taxation year, disposed of a taxable Québec property within the meaning of section 1 of the Act, shall pay a tax on his income earned in Québec for the year as determined under Part II of the Act. 6. The first paragraph of section 1089 of the Act provides that the income earned in Québec, for a taxation year, by an individual contemplated in section 26 of the Act is his income as determined under section 28 of the Act, taking into account only certain elements. Subparagraph c of the first paragraph of section 1089 of the Act provides that among those elements are taxable capital gains and allowable capital losses from disposition of taxable Québec property within the meaning of Part II of the Act, except to the extent provided by regulation.
7. Section 1089R17 of the Regulation respecting the Taxation Act (the Regulation ) provides that for the purposes of subparagraph c of the first paragraph of section 1089 of the Act, in computing the income earned in Québec in a taxation year by an individual contemplated in section 26 of the Act, capital gains or losses resulting from the disposition of property contemplated in paragraphs c to i of section 1094 of the Act shall not be taken into consideration. That property is described in paragraphs c to i of article 1 above. 8. Under the first paragraph of section 1097 of the Act, an individual not resident in Canada who proposes to dispose of a taxable Québec property within the meaning of Part II of the Act (see articles 1 to 3 of this bulletin) other than a depreciable property, a property contemplated in paragraphs c to i of section 1094 of the Act (see paragraphs c to i of article 1 of this bulletin), a share of the capital stock of a public corporation or an interest therein, a unit of a mutual fund trust, a bond, debenture, bill, note, mortgage, hypothec or other similar obligation may, before such disposition, send the Minister a notice containing: (a) the name and address of the proposed purchaser; (b) a description of the property sufficiently precise to recognize it; (c) the estimated amount of the proceeds of disposition to be received by him for such property; and (d) the amount of the adjusted cost base (ACB) of such property on the date of such notice. 9. Section 1099 of the Act provides that every person not resident in Canada shall, when the disposition of property contemplated in section 1097 of the Act is made, give notice thereof to the Minister within ten days, by registered or certified mail, where: (a) the notice provided for in section 1097 of the Act has not been sent; (b) the purchaser is not the proposed purchaser mentioned in the notice; (c) the estimated amount mentioned in the notice provided for in section 1097 of the Act is less than the actual proceeds of disposition of such property; or (d) the amount of the ACB mentioned in the notice provided for in section 1097 of the Act in respect of such property exceeds its adjusted cost base immediately before its disposition. Such notice must contain the information mentioned in subparagraphs a and b of the first paragraph of section 1097 of the Act (see paragraphs a and b of article 8 of this bulletin) and indicate the actual proceeds of disposition of the property and the amount of its ACB immediately before the disposition. 10. It should be pointed out that the notice provided for in section 1097 of the Act is optional whereas that provided for in section 1099 of the Act is compulsory. Those notices are filed by means of form TP-1097-V. 11. When an individual not resident in Canada proposes to dispose of a taxable Québec property that is depreciable property, property referred to in paragraphs c to i of section 1094 of the Act (see
paragraphs c to i of article 1 of this bulletin), a share of the capital stock of a public corporation or an interest therein, a unit of a mutual fund trust, a bond, debenture, bill, note, mortgage, hypothec or other similar obligation, he cannot send the notice provided for in section 1097 of the Act. Furthermore, that individual does not have to send the notice provided for in section 1099 of the Act since the property he is disposing of is not a property referred to in section 1097 of the Act. 12. Section 1098 of the Act provides that the Minister shall issue without delay to an individual not resident in Canada who proposes to dispose of a taxable Québec property referred to in section 1097 of the Act and to the proposed purchaser upon receipt of the notice provided for in section 1097 of the Act (see article 8 of this bulletin) and upon payment, on account of the tax payable by that individual, of an amount equal to 18% of the excess of the estimated amount of the proceeds of disposition of the property over its ACB on the date of the notice provided for in section 1097 of the Act or upon the furnishing of a surety acceptable to the Minister in that respect, a certificate in prescribed form (TPF-1098-V) fixing the amount which such person proposes to receive from the disposition of the property referred to in section 1097 of the Act. 13. Section 1100 of the Act provides that the Minister shall issue without delay to a person not resident in Canada who has disposed of a taxable Québec property referred to in section 1097 of the Act and to the purchaser upon receipt of the notice provided for in section 1099 of the Act (see article 9 of this bulletin) and upon payment, on account of tax payable by such person, of an amount equal to 18% of the excess of the proceeds of disposition of the property over its ACB immediately before its disposition or upon furnishing a surety acceptable to the Minister in that respect, a certificate in prescribed form (TPF-1098-V) attesting such facts. 14. Section 1101 of the Act provides for certain rules where a person acquires a taxable Québec property referred to in section 1097 of the Act (see article 8 of this bulletin) from a person not resident in Canada: (a) under subparagraph a of the first paragraph of section 1101 of the Act, the purchaser is liable to pay to the Minister, as tax on behalf of such person not resident in Canada, an amount equal to 18% of the amount by which the purchase price of the property to the purchaser exceeds, as the case may be, the amount set forth in the certificate issued under section 1098 of the Act in respect of the disposition of the property by the person not resident in Canada; (b) under subparagraph b of the first paragraph of section 1101 of the Act, the purchaser is entitled to deduct from any amount which he pays to the vendor or to withhold from any amount which he credits him or to recover from him in any other manner the amount which he has paid under subparagraph a of section 1101 of the Act; (c) under subparagraph d of the first paragraph of section 1101 of the Act, the purchaser shall within the 30 days after the end of the month in which he acquires the property, pay to the Minister the amount for which he is liable under subparagraph a of the first paragraph of section 1101 of the Act.
The last paragraph of section 1101 of the Act provides that that section does not apply to a purchaser where a certificate has been issued to him by the Ministère under section 1100 of the Act in respect of the property or where, after reasonable inquiry, he had no reason to believe that the vendor with whom he dealt was not resident in Canada. The Ministère considers that normally, the purchaser must at least inquire from the vendor s lawyer or agent of the vendor s place of residence. If no exact answer is thus obtained, the Ministère generally considers that a letter written by the vendor, stating that he is resident in Canada, constitutes sufficient proof to free the purchaser of the obligation to pay the tax unless there exist reasons to question the vendor s declaration. In all cases, the Ministère will not conduct an investigation on behalf of the purchaser in this respect. 15. Section 1102 of the Act provides, among other things, that where a person who is not resident in Canada disposes or proposes to dispose of a property which is or would be, if he disposed of it, a taxable Québec property that is referred to in section 1097 of the Act (see article 8 of this bulletin), to any person with whom he is not dealing at arm s length, for no consideration or for consideration less than its fair market value at the time of the disposition or proposed disposition, or to any person by way of gift inter vivos, the following rules apply: (a) subparagraph c of the first paragraph of section 1097 of the Act (see paragraph c of article 8 of this bulletin) must be read as a reference to the amount he considers to be the fair market value of the property at the time he proposes to dispose of it ; (b) the reference in section 1098 of the Act (see article 12 of this bulletin) to the amount which such person proposes to receive from the disposition must be read as a reference to the amount that such person considers to be the fair market value of the property; (c) the references in sections 1099 and 1100 of the Act (see paragraph c of article 9 and article 13 of this bulletin) to the proceeds or actual proceeds of disposition of the property must be read as references to the fair market value of the property immediately before it was disposed of; and (d) the reference in section 1101 of the Act (see paragraph a of article 14 of this bulletin) to the purchase price of the property must be read as a reference to its fair market value at the time it was acquired. The last paragraph of section 1102 of the Act provides that that section does not apply when, by reason of the death of a person, a property is transferred or distributed on or after his death. Disposition of a Taxable Québec Property by a Corporation not Resident in Canada that does not have an Establishment in Québec at any Time in a Taxation Year 16. The first paragraph of section 27 of the Act provides that any corporation that does not have an establishment in Québec at any time in a taxation year, is not resident in Canada and disposes in a taxation year of taxable Québec property within the meaning of section 1 of the Act, shall pay a tax at the rate established in subsection 1 of section 771 of the Act on, among others, the amount by
which the aggregate of its taxable capital gains exceeds the aggregate of its allowable capital losses from the disposition of such property. When section 27 of the Act applies to a taxation year that ends after April 26, 1990 and before September 1, 1991, the tax payable by such a corporation is computed at the rate established in subsection 1 of section 771 of the Act and sections 771.0.1.1 and 771.0.1.2 of the Act. When the taxation year of the corporation ends before April 27, 1990, the tax payable by the corporation is computed at the rate established in subsection 1 of section 771 of the Act and sections 771.0.1 and 771.0.1.1 of the Act. 17. The rules provided for in articles 8 to 14 of this bulletin concerning the disposition of a taxable Québec property also apply to a corporation that is not resident in Canada, by adapting them as follows: (a) in articles 8, 11 and 12 by replacing individual by corporation throughout; (b) in articles 8 and 11 by replacing the reference to paragraphs c to i of section 1094 of the Act and the reference to paragraphs c to i of article 1 of this bulletin by a reference to paragraph i of article 1 of this bulletin. These adaptations are made under the last paragraph of section 1097 of the Act. 18. The following example applies both to the disposition of a property by an individual not resident in Canada and by a corporation not resident in Canada that has no establishment in Québec. On January 1, 19_1 1, Mr. XX, a taxpayer not resident in Canada, proposes to sell land situated in Québec to Mr. Y. The sale must be finalized on March 1, 19_1. The ACB of the land on January 1, 19_1 is $10 000. The sale price then agreed upon is $20 000. On the same day, Mr. XX files with the Minister of Revenue the notice provided for in section 1097 of the Act as well as $1 800, i.e. 18% of the amount by which the amount he estimates he will receive ($20 000) exceeds the amount of the ACB on the date of the notice ($10 000). Mr. XX, therefore, obtains the certificate referred to in section 1098 of the Act. On March 1, 19_1, Mr. XX actually sells the land, but the proceeds of disposition are $30 000. Mr. Y must, under section 1101 of the Act, pay as tax on behalf of Mr. XX, 18% of the amount by which the purchase price of the property ($30 000) exceeds the amount mentioned on the certificate in respect of the disposition ($20 000), i.e. $1 800 [(30 000 20 000) x 18%]. Mr. Y is entitled to deduct from any amount he pays to the vendor or to withhold from any amount he credits him or to recover from him in any other manner, the amount he paid as tax on behalf of Mr. XX. That amount must be paid within the 30 days after the end of the month in which he acquires the property, namely April 30, 19_1. On March 5, 19_1, Mr. XX files with the Minister of Revenue the notice provided for in section 1099 of the Act. Moreover, to obtain the certificate provided for in section 1100 of the Act, Mr. XX includes with his notice, an amount of $1 800, i.e. 18% of the amount by which the proceeds of disposition ($30 000) of the property exceed its ACB immediately before the disposition ($10 000), 1 19_1 (first year of the transaction)
namely $3 600, less the amount of $1 800 previously sent on January 1, 19_1. Following this, the Minister of Revenue issues to Mr. XX and to Mr. Y, the certificate provided for in section 1100 of the Act. Thenceforth, the obligation imposed on Mr. Y to pay an amount of tax on behalf of Mr. XX ceases under the second paragraph of section 1100 of the Act. International Tax Conventions and Agreements 19. Section 488 of the Act provides, among others, that a taxpayer shall not include, in computing his income for a taxation year, the amounts provided for in the regulations. Paragraph d.1 of section 488R1 of the Regulation provides that, under section 488 of the Act, among the amounts that shall not be included in computing a taxpayer s income are the amounts, other than amounts received or receivable by an individual that are exempt from income tax in Québec by virtue of a provision of a tax agreement entered into by Québec and a particular country in matters of income tax and which has force of law in Québec, or, in the absence of such an agreement, amounts exempt from income tax in Canada by virtue of a provision of a tax convention or agreement entered into by Canada and a particular country and which has force of law in Canada. Paragraph e of section 488R1 of the Regulation provides that, under section 488 of the Act, among the amounts that shall not be included in computing a taxpayer s income are the amounts that are specifically exempt from income tax by virtue of a law of Québec or of the Government of Canada, other than the Income Tax Act (Statutes of Canada), the Income Tax Law Amendment Act, 1971 (Statutes of Canada), the Indian Act (Statutes of Canada), the Foreign Missions and International Organizations Act (Statutes of Canada) and the Act respecting industrial accidents and occupational diseases (R.S.Q., c. A-3.001) and which are not amounts that are exempt by virtue of a provision of a tax agreement entered into by Québec and a particular country in matters of income tax and which has force of law in Québec, or a tax convention or agreement entered into by Canada and a particular country in matters of income tax and which has force of law in Canada. 20. Paragraph a of section 725 of the Act provides that an individual may deduct, in computing his taxable income, any amount exempt from income tax in Québec by virtue of a provision contained in a tax agreement between Québec and a particular country in matters of income tax and which has the force of law in Québec, or, in the absence of such an agreement, an amount exempt from income tax in Canada by virtue of a provision contained in a tax convention or agreement concluded between Canada and another country and which has the force of law in Canada. 21. The Ministère allows the vendor or the eventual vendor, as the case may be, to claim an exemption by reason of a provision contained in a tax convention or agreement, as the case may be, in matters of income tax concluded between Québec and a country other than Canada and which has the force of law in Québec, or between Canada and another country and which has the force of law in Canada. 22. The vendor or the eventual vendor, as the case may be, must present the documents required to justify his claim. Such document may be a proof of residence or evidence that the gain was or shall be reported in the vendor s country. The fiscal authorities of certain countries will supply the certificate required to claim the exemption.
23. The Ministère requires at least 60 days to make the necessary determination. The vendor or the eventual vendor, as the case may be, is responsible for supplying the necessary documents in support of his claim. If the Ministère and the vendor or the eventual vendor, as the case may be, fail to reach an agreement on the applicability of the exemption under a particular tax convention or agreement, as the case may be, the vendor or the eventual vendor, as the case may be, shall supply the necessary payment or guarantee before the Ministère issues a certificate in prescribed form (TPF-1098-V). When the matter is settled, the vendor may apply for a reimbursement of or receipt for his guaranty according to the final decision. 24. The granting of an exemption at the time of the notice of disposition corresponds to the Ministère s policy and is therefore discretionary. For this reason, the Ministère will deliver a certificate in prescribed form (TPF-1098-V) stating that the disposition is exempted by reason of a tax convention or agreement, as the case may be. The Ministère, though, only delivers a certificate in such cases if all other debts owing toward the Ministère have been paid. General Considerations 25. The disposition of a taxable Québec property also includes a deemed disposition, in particular, one which occurs upon the death of a taxpayer not resident in Canada, or a deemed sale upon the winding-up of a corporation not resident in Canada that holds such a property. Likewise, the proceeds of disposition also include the deemed proceeds, in particular, the fair market value of a property disposed of as part of a non-arm s length transaction. 26. According to the Ministère, the obligation of the purchaser of a property referred to in section 1097 of the Act, under section 1101 of the Act, does not extend to a mortgagee who acquired such a property by foreclosure, unless the mortgage and foreclosure transactions were made to sell the property. It should be noted, though, that even where section 1101 of the Act does not apply to the purchaser, the vendor who is not resident in Canada may obtain a certificate under section 1098 or 1100 of the Act. 27. This bulletin applies in respect of the disposition or the acquisition, as the case may be, of a taxable Québec property after December 31, 1989, subject, though, to the clarifications made in the first paragraph of article 3 of this bulletin and in paragraph e of article 4 of this bulletin. However, articles 21 to 24 inclusively, of this bulletin, apply to requests received after December 31, 1992.