25 March 1998 External T.I. 9733045 - Income derived from Irish partnership

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:

Taxation of income derived by a Canadian resident partner of an Irish partnership from sources in Ireland.

Position:

Depends on the nature of the income - require additional information

Reasons:

Insufficient information provided

973304
XXXXXXXXXX Olli Laurikainen
(613)957-2116

March 25, 1998

Dear Sir:

Re: Income Tax Agreement Canada - Ireland (the “Agreement”)

This is in reply to your letter dated December 8, 1997. You request our views in reference to the application of various provisions of the above Agreement to an individual resident in Canada who owns an interest in a partnership which in turn owns buildings and land in Ireland.

The information which you provide in your letter does not contain sufficient detail for us to determine with certainty the tax consequences to the above individual that may arise from his having held an interest in the partnership. However, we will provide the following general comments.

A Canadian resident is taxable on his world-wide income under the Income Tax Act (Canada) (the ”Act”). This income will include, where the taxpayer is a member of an Irish partnership, the taxpayer’s share of any income from that partnership computed in accordance with the rules in the Act in Canadian dollars. For example, a capital gain of an Irish partnership would generally be determined as the excess of the proceeds of disposition translated into Canadian dollars at the exchange rate in effect when the property is disposed of over the cost of the property translated at the exchange rate in effect at the date the property was acquired.

Ireland may also tax a Canadian resident on income from sources in Ireland. Irish taxes would be based on income as computed in accordance with Irish domestic tax law and in Irish currency. As a result, an amount of income from a particular source that is taxable in Ireland under Irish domestic law may be different than the amount from the same source that is taxable for the purposes of the Act in Canada. For example, you mention that Irish tax law allows for an index factor for inflation in the computation of capital gains. No such indexing is done for the purposes of computing capital gains under the Act.

Once the income of a taxpayer is determined under the Act, he can then look to the provisions of the Agreement to consider whether any portion of such income or gains derived from sources in Ireland is exempt in Canada by virtue of a provision of the Agreement. Buildings and land are “immovable property” for the purposes of Article VIII of the Agreement. It is our view that Article VIII of the Agreement applies to income from immovable property but would not apply to a capital gain from the disposition of immovable property. In the absence of a specific provision in the Agreement dealing with capital gains, it is our view that Article VI would apply to capital gains.

Paragraph 1 of Article VIII of the Agreement provides that income from immovable property may be taxed in the territory in which such property is situated. In the circumstances you describe, it is our view that the purpose of paragraph 1 of Article VIII of the Agreement is to clarify that notwithstanding that the income may be of a resident of Canada, Ireland may tax income arising from property if the property is situated in Ireland. However, this does not mean that Canada may not also tax such income. Similarly, Article VI of the Agreement does not restrict Canada’s right to tax its residents on capital gains from the disposition of capital property in Ireland.

Where a Canadian taxpayer has paid income tax to Ireland in respect of income that was earned by him from Ireland, he can generally claim a foreign tax credit under the provisions of section 126 of the Act and Article XIV of the Agreement. If Canadian tax rates on such income exceed the tax rate paid in Ireland, the foreign tax credit computed under section 126 will generally not be sufficient to eliminate the full amount of the taxpayer’s liability for Canadian tax on such income. Other than this foreign tax credit there is nothing in the Agreement that provides relief in respect of Canadian taxes in these circumstances. You in your letter mention paragraph 1 of Article XVI of the Agreement. The application of that provision to these circumstances could only be to limit Irish tax. It would apply for example if the Irish tax to which the resident of Canada was otherwise subjected under Irish domestic tax law was more burdensome than the tax he would pay if he had been a national of Ireland.

You have also inquired about the adjusted cost base of assets of the partnership for the purpose of computing capital gains in the event they were to be sold. You mention that you have a valuation dated January 1982 and that the partnership was formerly a corporation. The January 1982 valuation has no particular significance for the purpose of the Act unless it happens to be time when the property was acquired by the partnership. As indicated earlier the capital gains resulting from any disposition of assets by the partnership will be computed pursuant to the Act for the purposes of determining the income of a partner resident in Canada. If the property of the partnership was acquired after December 31, 1972, its adjusted cost base for the purpose of computing capital gains will be its cost to the partnership. If the assets were acquired in the course of a reorganization that was tax-free in Ireland, the adjusted cost base of the assets for the purpose of the Act may not necessarily the same as that used for the purposes computing gains under Irish tax law. In order to make the necessary determinations, Revenue Canada would need to be provided with all of the details of the reorganization including the fair market value of all of the assets that were acquired by the partnership in the course of that reorganization, and details of the property that was disposed of and /or acquired by shareholders of any corporation that ceased to exist at that time and the property disposed of and/or acquired by partners of the partnership.

We hope that you will find the above information to be of some assistance.

Yours truly,

for Director
Reorganisations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch