Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1. Did the residual capital beneficiary acquire beneficial ownership of the property held in the trust in XXXXXXXXXX when the trust was created?
2. Does Article XIII(9) of Canada-US treaty exempt any portion of the US resident's gain on property acquired from trust under 107(2) in 1997?
Position: 1. No. 2. No.
Reasons: 1. Paragraph 1 of IT-449R. Unless the trustee can reasonably be considered to act as agent for the beneficiary, the beneficiary does not have beneficial ownership of the property held in the trust but rather, has an interest in the trust.
2. As shown in example 5 of the US Technical Notes to Article XIII(9), the exemption in 9(b) for property acquired in non-recognition transactions only applies when all owners of the property after Sept 26, 1980 were resident in the "other" Contracting State during the time that owner held the property. In the case of an exemption from Canadian tax under Article XIII(9), each owner of the property after Sept. 26, 1980 would have to have been resident in the US for the period of time after Sept. 26th when that owner owned the property.
September 11, 2001
XXXXXXXXXX Tax Services Office HEADQUARTERS
International Audit Annemarie Humenuk
Attention: XXXXXXXXXX
2001-008011
XXXXXXXXXX and the Disposition of Real Property by a Non-Resident
This is in response to your memorandum of April 6, 2001, concerning the disposition of real property located in Canada by a resident of the United States (the U.S.).
Except as otherwise noted, all statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
Facts
Our understanding of the facts is as follows:
1. A testamentary trust (the "Trust") was created in XXXXXXXXXX upon the death of XXXXXXXXXX, a resident of Canada.
2. At all times during the existence of the Trust, the trustee of the Trust, and thus the Trust, was resident in Canada. The Trust's taxation year ended on XXXXXXXXXX.
3. Under the terms of the Trust, the sole income beneficiary of the Trust was the deceased's daughter, XXXXXXXXXX, a resident of the U.S.
4. Upon the death of XXXXXXXXXX, the property of the trust was to be distributed to XXXXXXXXXX, grandson of the deceased and a resident of the U.S.
5. In the event that XXXXXXXXXX (the "Taxpayer"), predeceased his mother, XXXXXXXXXX, the property of the Trust was to be distributed according to the will of XXXXXXXXXX, or in the event that she died without a will, to her heir or heirs.
6. The property of the Trust consisted of land located in XXXXXXXXXX.
7. The Trust rented the land and distributed the income from the land to XXXXXXXXXX on an annual basis during her lifetime.
8. XXXXXXXXXX died in XXXXXXXXXX and a final T3 return was prepared by the trustee for the Trust's taxation year ended XXXXXXXXXX.
9. The Trust reported the disposition of the land arising from its distribution to the Taxpayer for proceeds of disposition equal to the adjusted cost base of $XXXXXXXXXX, utilizing the provisions of subsection 107(2). We understand that you are in the process of verifying that the discrepancy between the Taxpayer's name and the name of the capital beneficiary named in the will of XXXXXXXXXX.
10. In XXXXXXXXXX, a clearance certificate as described in subsection 159(2) was issued to the trustee by the XXXXXXXXXX TSO in respect of the trustee's distribution of the Trust property to the Taxpayer.
11. The Taxpayer sold the property in XXXXXXXXXX and requested a certificate of compliance on Form T2062, as required by subsection 116(1). The Taxpayer has claimed a partial exemption of the capital gain reported on the certificate of compliance based on paragraph 9 of Article XIII of the Canada-US Tax Convention (the "Convention").
Issue
The Taxpayer's representative argues that the gain on the disposition (the "Disposition") of the land by the Taxpayer should be reduced according to the formula set out in paragraph 9 of Article XIII of the Convention on the basis that the Taxpayer has had beneficial ownership of the land since XXXXXXXXXX. You ask us to confirm that an individual with a capital interest in a trust does not acquire beneficial ownership of the property held in the trust until such time as the property is distributed to the beneficiary with the result that the benefit under paragraph 9 of Article XIII of the Convention is not available to the Taxpayer.
As stated in paragraph 1 of IT-449R, Meaning of "Vested Indefeasibly", where property is held in trust for the benefit of one or more persons it is the CCRA's view that such property normally vests indefeasibly in the trust and not in a beneficiary thereof. However, where the CCRA is satisfied that a property is held in trust solely to carry out the terms of a will under which the ultimate and absolute ownership of that property is bequeathed to a particular individual and the trust arrangement is such that the individual's ownership rights cannot be defeated by any future event and no other person has any right whatsoever to an immediate or future benefit from that property or that trust, the property will be considered to vest indefeasibly in that individual.
As noted above, the Taxpayer's interest in the trust is defeasible as it is subject to a condition subsequent contained in the will, that is, that he survive his mother. If he predeceases his mother, the property is to be distributed not according to his will, but according to the will of his mother. In addition, his interest in the trust does not support his claim of beneficial ownership of
the Trust property since XXXXXXXXXX as there is another beneficiary, his mother, who was entitled to benefit from the Trust's property prior to XXXXXXXXXX. Accordingly, it is our view that he did not acquire beneficial ownership of the property until such time as it was distributed to him by the Trust.
We also considered the application of paragraph 9 of Article XIII of the Convention to the Taxpayer's gain on the Disposition. The exemption described in paragraph 9 of Article XIII of the Convention from all or part of a gain which would otherwise be taxable in Canada is available to a resident of the U.S. where either of the conditions in (a) or (b) of that paragraph is met and none of the conditions in (c), (d) or (e) of that paragraph are met.
As the Taxpayer has only owned the property in question since XXXXXXXXXX, the condition in subparagraph 9(a) of Article XIII of the Convention is not met. A distribution of property that is subject to subsection 107(2) is a non-recognition transaction for Canadian tax purposes. Since the property in question is taxable Canadian property, subsection 107(5) does not apply to the distribution of property from the Trust such that the provisions of subsection 107(2) would apply provided that the Trust does not make an election under paragraph 107(2.001). As indicated above, the Trust utilized the provisions of subsection 107(2) in respect of the distribution of property to the Taxpayer and as a result, the condition in subparagraph 9(b) of Article XIII of the Convention is met in respect of the Disposition.
However, because of subparagraph 9(d) of Article XIII of the Convention, paragraph 9 does not apply to property situated in one contracting state that has been owned at any time since September 26, 1980 by a person who was not resident in the other contracting state at the time such person owned the property (excluding any period of ownership before September 27, 1980). Examples 4 and 5 of the Technical Explanation released by the United States Treasury Department on April 26, 1984, which both describe situations involving non-recognition transactions, clarify this point. Example 4 illustrates the situation in which paragraph 9 of Article XIII of the Convention applies because of a prior non-recognition transaction. In example 5, which is similar to the situation under review, the non-recognition transaction occurs between a resident of one contracting state and a resident of the other contracting state. In that example, the Canadian resident is not entitled to any benefit under Article XIII of the Convention in respect of the disposition of real property located in the U.S. because, although the Canadian resident acquired the property by means of a non-recognition transaction, the property had been owned by a resident of the U.S. (i.e., someone not resident in Canada) for some period of time after September 26, 1980.
Accordingly, although the distribution of property to the Taxpayer in XXXXXXXXXX is a non-recognition transaction for the purposes of the Convention, he is not entitled to any benefit under Article XIII in respect of the Disposition because the property in question was owned by the Trust for some portion of time following September 26, 1980 and the Trust was not resident in the U.S. during the period it owned the property after September 26, 1980.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the CCRA's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.
T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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