Over the past few years, there have been several changes surrounding the requirement to file a T2062 – Request for a Certificate of Compliance, for distributions of a Canadian Estate to a non-resident beneficiary. I will spare you the mind-numbing details of what the changes were and discuss only what is required now.
First, in Part 1 of this topic, I will explain what a T2062 is, it’s purpose, and how it relates to distributions to non-residents. As a separate post, Part 2 of this topic will discuss when a T2062 is required and the mechanics of filing one. Feel free to skip this post (Part 1) if you are familiar with the basics and only need guidance for dealing with a specific situation.
If you are a beneficiary of an Estate, you are considered to have an interest in the Estate. This may be an income interest or a capital interest. When a beneficiary is entitled to receive some or all of the Estate assets, they are a capital beneficiary. A beneficiary who is entitled only to the income earned on Estate assets and not to the underlying assets themselves is called an income beneficiary.
The most common scenario I encounter is distributions of cash to capital beneficiaries from a deceased person’s Estate. All references to “distributions” in Part 1 and Part 2 speak to this common scenario.
When a non-resident sells an asset located in Canada, Canadian income tax must be considered. Consider the situation where a non-resident (seller) sells their Canadian real estate property to a resident of Canada (the purchaser). If the seller does not file the appropriate returns and pay the required income tax, Canada Revenue Agency (CRA) will hold the purchaser liable for taxes and penalties far greater than what would have been required if the seller had complied with CRA rules. This puts the onus on the purchaser to ensure the seller has reported the transaction to CRA, CRA agrees with what has been reported, and the seller has paid any taxes resulting from the transaction. How does the purchaser know when the seller has done this? CRA will issue a Certificate of Compliance to the seller and the seller provides a copy to the purchaser. The purchaser can then release the cash proceeds to the seller without fear of being held liable for someone else’s (the seller’s) unpaid taxes. A Certificate of Compliance is obtained by filing a T2062.
So what the heck does this have to do with making a distribution to a non-resident beneficiary?
When you receive a distribution as beneficiary, CRA considers you to have “sold” some or all of your interest in the Estate in exchange for something of value (usually cash). In this transaction, the beneficiary is the “seller” and the Estate is the “purchaser”. When the beneficiary (seller) is a non-resident of Canada, the purchaser (the Estate) needs to determine if the beneficiary (seller) should be filing a T2062. In most cases, the proceeds received are equal to the beneficiary’s cost so there is no gain or loss resulting from the distribution and therefore, no income taxes to pay. However, even if the beneficiary is not required to pay taxes, he/she may still be required to report the “transaction” to CRA on a T2062. So what happens if a T2062 was required, but not filed? CRA can hold the Estate (or Executor) liable for non-filing penalties. The penalty is $25 per day late to a maximum of $2,500 per distribution to each non-resident beneficiary. If you have 5 non-resident beneficiaries and do two distributions each, the penalty could be $25,000 ($2,500 x 5 x 2).
So if you are an Executor, what are your responsibilities and when do you need to be concerned about T2062 filing requirements for distributions to non-resident beneficiaries? Luckily, the end result of the changes to tax legislation over the past few years is a dramatic reduction in the number of situations where T2062’s are required for distributions to non-residents. In addition, CRA has somewhat relaxed their administrative policies to make it easier to file the T2062 for these situations when it is required.
In my next post (Part 2), I will provide a decision tree to determine when a T2062 or T2062C is required and explain the mechanics of filing these forms. I will also use a few common examples I have encountered in practice.
Talk to you soon,
Heather
