Estates with Non-Resident Beneficiaries: Tax Withholding and Compliance Certificates

While we are not tax advisors or professional accountants, and we do not provide tax advice, we do spend a great deal of time assisting folks who find themselves as executor or administrator of an estate (generally known as a personal representative of an estate). One of the ways we can help is by flagging potentially relevant tax considerations. This can help ensure the personal representative is alert to the importance of obtaining robust professional tax advice.

One example of an important tax consideration can arise when a personal representative administers an estate that includes beneficiaries who reside outside of Canada. In such circumstances, the personal representative must take particular care to comply with the obligation imposed by the Income Tax Act to withhold 25% of certain distributions made to non-resident beneficiaries, unless and until a compliance certificate is obtained from the Canada Revenue Agency (CRA).

Failure to follow this process can expose the personal representative to personal liability for unpaid taxes that may later be assessed against the estate in connection with distributions to non-residents.

What is a compliance certificate?

A compliance certificate (commonly referred to as a certificate of compliance or a “section 116 certificate”) is issued by the CRA under section 116 of the Income Tax Act. It applies where a non-resident receives taxable Canadian property, including certain types of capital property, real estate, resource property, or interests in private corporations, partnerships, or trusts.

Generally, where the estate includes taxable Canadian property and one or more beneficiaries are non-residents of Canada, the personal representative must either obtain a compliance certificate or withhold and remit 25% of the gross distribution amount to the CRA.

When does the withholding obligation arise?

The 25% withholding obligation typically applies when:

• The beneficiary is a non-resident of Canada for tax purposes; and
• The property being distributed is considered taxable Canadian property under the Income Tax Act.

This includes, but is not limited to:

• Canadian real estate;
• Shares in private Canadian corporations;
• Certain resource properties;
• Other specified assets deemed taxable under Canadian tax rules.

Where such property is distributed without the appropriate compliance certificate in hand, the personal representative must withhold 25% of the gross proceeds and remit that amount to the CRA as a prepayment on taxes that the non-resident beneficiary may owe.

Consequences of non-compliance

If a personal representative fails to obtain a compliance certificate or to withhold and remit the required 25%, they may be held personally liable for the unpaid tax, interest, and any applicable penalties. This liability can apply regardless of whether the beneficiary ultimately pays their tax or whether the personal representative was aware of the beneficiary’s non-resident status.

Moreover, the CRA may take enforcement action against the personal representative or the estate, potentially resulting in costly assessments and delays in closing the estate administration.

Practical considerations

The compliance certificate process can be time-consuming and complex, and it often takes several months for the CRA to process an application. For this reason, personal representatives should determine the tax residency of each beneficiary early in the administration process and seek professional advice where a non-resident beneficiary is identified.

Where it is unclear whether the property being distributed is taxable Canadian property or a transfer of an estate asset out of Canada is subject to the above-described requirements, professional tax advice should generally be obtained to determine whether section 116 of the Income Tax Act applies and whether a compliance certificate is required.

Conclusion

When administering an estate with one or more non-resident beneficiaries, personal representatives must be aware of their obligation to obtain a compliance certificate or withhold and remit 25% of the gross value of taxable Canadian property before making any distributions. This requirement is critical in avoiding personal liability and ensuring full compliance with Canadian tax law.

Understanding and following the procedures under the Income Tax Act is an essential part of prudent estate administration where there is international involvement, especially where there are non-resident beneficiaries.

If one finds oneself in the position of being the personal representative of an estate, it is prudent to promptly seek expert legal and tax advice to help navigate the estate administration process smoothly and efficiently. An experienced estate lawyer and a professional tax advisor (e.g. a Chartered Professional Accountant) can work together with executors and estate administrators to help them understand and safely navigate the legal and tax landscape they are operating in. A team of such qualified professionals can also provide vital support and guidance through the practical day-to-day matters of administering an estate.

If you have questions about this post or would like assistance with any estate administration or estate planning matters, please get in touch.