INTERPRETATION AND ADMINISTRATIVE BULLETIN CONCERNING THE LAWS AND REGULATIONS Income Tax IMP. 1102.1-1 Disposition of a Québec Property, a Québec Resource Property or a Life Insurance Policy by a Non-Resident Date of publication: July 31, 1989 Reference(s): Taxation Act (R.S.Q., c. I-3), sections 370, 488, 725, 1089, 1094, 1102, 1102.1, 1102.2 and 1102.3 Regulation respecting the Taxation Act (R.R.Q., 1981, c. I-3, r.1, as amended), sections 488R1 and 1089R15 This bulletin gives the interpretation of the Ministère du Revenu where a person not resident in Canada disposes of or proposes to dispose of a depreciable Québec property, a Québec resource property or a life insurance policy described in paragraph k of section 1089 of the Taxation Act. APPLICATION OF THE ACT 1. Section 1102.1 of the Taxation Act (the act ) provides that where a person who is not resident in Canada disposes or proposes to dispose to a taxpayer, in a taxation year, of a life insurance policy described in paragraph k of section 1089 of the act, a Québec resource property within the meaning of paragraph d of section 1089 of the act or depreciable property that is or would be, if he disposed of it, a taxable Québec property and where to such effect, he pays to the Minister, on account of his tax payable for the year, an amount that the Minister considers reasonable taking into account the disposition or proposed disposition of such property or furnishes security acceptable to the Minister in respect of the disposition or proposed disposition, the Minister shall forthwith issue to that person and to the taxpayer a certificate in prescribed form indicating the amount of the proceeds of the disposition or proposed disposition of the property or such other amount as is reasonable in the circumstances. 2. Section 1102.2 of the act provides that where in a taxation year a taxpayer acquires from a person not resident in Canada property referred to in section 1102.1 of the act, the following rules apply: (a) the taxpayer shall pay, as tax on behalf of such person, an amount equal to 30% of the amount by which his purchase price of the property exceeds the amount indicated in the certificate referred to in section 1102.1 of the act;
(b) the taxpayer is entitled to deduct or withhold from any amount paid or credited by him to such person or to otherwise recover from such person the amount paid by him under subparagraph a; and (c) the taxpayer shall, within 30 days after the end of the month in which he acquired the property, remit to the Minister the amount for which he is liable under subparagraph a. The last paragraph of section 1102.2 of the act provides that that section does not apply to a taxpayer who, after reasonable inquiry, had no reason to believe that the person from whom he acquired the property was not resident in Canada. The Ministère considers that normally, the purchaser must at least inquire of 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. 3. Sections 1102.1 and 1102.2 of the act do not impose any obligation upon a person not resident in Canada who disposes of a property referred to in those sections. However, a taxpayer who acquires such a property from a person not resident in Canada is obliged to pay the amount determined in section 1102.2 of the act. Examples: Mr. X, not resident in Canada, disposes of a depreciable taxable Québec property to a taxpayer, Mr. Y. The proceeds of disposition are $20,000. The capital cost of the property to Mr. X is $10,000. (a) Example A: Mr. X elects not to pay any amount on account of his tax payable for the year in respect of the disposition of the property. Therefore, no certificate is delivered by the Minister. Mr. Y must thus pay $6,000 as tax on behalf of Mr. X, namely 30% of the amount by which his purchase price ($20,000) exceeds the amount mentioned on the certificate ($0 since there is no certificate). (b) Example B: Mr. X elects to pay $1,500 on account of his tax payable for the year in respect of the disposition of the property. The Minister issues a certificate stating the proceeds of disposition to be $20,000. Mr. Y has no tax to pay on behalf of Mr. X, since the amount of his purchase price ($20,000) does not exceed the amount mentioned on the certificate ($20,000). 4. Section 1102.3 of the act provides that where a person who is not resident in Canada has disposed of a life insurance policy described in paragraph k of section 1089 of the act, by virtue of section 967 of the act or of a surrender, a policy loan, a dissolution of an interest in the policy by virtue of the maturity of the policy or a particular payment referred to in paragraph a of section 966 of the act, the insurer is, for the purposes of sections 1102.1 and 1102.2 of the act, deemed to be the taxpayer who acquired the property for an amount equal to the proceeds of disposition as determined under sections 966 to 977.1 of the act.
Non-Arm s Length Transaction 5. Paragraph d of 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 life insurance policy described in paragraph k of section 1089 of the act, a Québec resource property within the meaning of paragraph d of section 1089 of the act or a property which is or would be, if he disposed of it, a taxable Québec property that is depreciable property 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 reference in section 1102.2of the act (see paragraph 2 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. 6. 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. Québec Resource Property 7. The Regulation respecting the Taxation Act (the regulation ) must be consulted for the meaning of the expression Québec resource property within the meaning of paragraph d of section 1089 of the act. Section 1089R15 of the regulation provides that for the purposes of paragraph d of section 1089 of the act, a Québec resource property means a property that would be contemplated in section 370 of the act if the words Canada and Canadian were replaced by the word Québec. Hence, a Québec resource property within the meaning of paragraph d of section 1089 of the act is: i. any right, licence or privilege to explore for, drill for or take petroleum, natural gas or other related hydrocarbons in Québec; ii. any right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Québec or to store underground petroleum, natural gas or related hydrocarbons in Québec; iii. any oil or gas well in Québec or any real property in Québec the principal value of which depends upon its petroleum or natural gas content, but not including any depreciable property used or to be used in connection with the extraction or removal of petroleum or natural gas therefrom; iv. any rental or royalty computed by reference to the amount or value of production from an oil or gas well in Québec or from a natural accumulation of petroleum or natural gas in Québec; v. any rental or royalty computed by reference to the amount or value of production from a mineral resource in Québec;
vi. any real property in Québec the principal value of which depends upon its mineral resource content, but not including any depreciable property used or to be used in connection with the extraction or removal of minerals therefrom, or vii. a right to or interest in any property contemplated in any of subparagraphs i to vi above, other than such a right or interest that the taxpayer has by virtue of being a beneficiary of a trust. Life Insurance Policy Referred to in Paragraph k of Section 1089 of the Act 8. A life insurance policy referred to in paragraph k of section 1089 of the act is a policy issued or effected by an insurer upon the life of a person resident in Québec at the time the policy was issued or effected. Depreciable Property that is a Taxable Québec Property 9. A depreciable property that is or would be, if it were disposed of, a taxable Québec property may be a property listed in paragraphs a to b.1 of section 1094 of the act: (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. International Tax Conventions and Agreements 10. 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 e of section 488R1 of the regulation provides that, under section 488 of the act, among the amounts that must not be included in computing a taxpayer s income is every amount that is specifically exempt from income tax pursuant to a law of Québec or the Government of Canada, other than the Income Tax Act (Statutes of Canada), the Income Tax Law Amendment Act, 1971 (S.C. 1970-71-72, c. 64) and the Indian Act (Statutes of Canada) that is not an amount received or receivable by an individual that is exempt by virtue of a tax convention or agreement concluded between Canada and another country in matters of income tax and which has the force of law in Canada. 11. Paragraph a of section 725 of the act provides that an individual may deduct, in computing his taxable income, an amount exempt from income tax in Québec by virtue of a provision contained in a tax convention or 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 convention or 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. 12. Despite the fact that a capital gain or any other income or gain resulting from the disposition of a taxable Québec property may be exempt from tax under paragraph 10 or 11 above, by virtue of the existence of a tax convention or agreement, the rules given in paragraph 2 above apply nonetheless. Hence, the taxpayer referred to in that paragraph must comply with these rules. General Considerations 13. The disposition of a taxable Québec property also includes a deemed disposition, in particular, that 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. 14. According to the Ministère, the obligation of the purchaser of a property referred to in section 1102.1 of the act, under section 1102.2 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 1102.2 of the act does not apply to a purchaser, a vendor who is not resident in Canada may obtain a certificate under section 1102.1 of the act.