29 April 1998 External T.I. 9803715 - RESTITUTION OF LAND BY A FOREIGN GOVERNMENT

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:

During the second world war, real property, owned by an individual, was seized by German forces of occupation. Subsequently, the real property was nationalized by the Latvian Soviet Regime. In 1996, following a restitution process, a Canadian resident (a rightful heir) acquired ownership of an interest in the property (the Property). What is the tax treatment of the Property?

Position:

For purposes of the Act, the cost of the Property would be its fair market value on the date that the Canadian resident acquired ownership of the interest. Any appreciation in value of the Property attributable to the period prior to such date would not be taxable under the Act, since such amount would be considered a "windfall" (see paragraph 3 of IT-334R2).

Reasons:

The position is consistent with previous correspondence.

XXXXXXXXXX 980371
M. Eisner

April 29, 1998

Attention: XXXXXXXXXX

Dear Sirs:

Re: Restitution of Land by a Foreign Government

This is in reply to your letter of March 11, 1998, wherein you requested our views concerning the determination of the adjusted cost base of an interest in property acquired by a Canadian resident in 1996 under a restitution process whereby property previously seized by German forces of occupation and subsequently nationalized by the Latvian Soviet Regime, is being returned to its previous owners or rightful heirs.

The Canadian resident became entitled to the interest in the property in respect of the restitution process as a result of the death of a previous heir (the mother of the Canadian resident who died while the Latvian Soviet Regime was still in existence) and the individual who owned the property prior to the seizure.

In order to determine the tax consequences of your situation it would be necessary to review the relevant facets and documentation. The review of such a situation falls within the responsibility of your local tax services office. However, we are prepared to provide you with general comments.

Our Comments

Provided that the taxpayer did not have rights associated with the ownership of an interest in a property until control of the property was conveyed under the restitution process, it is our view that the cost of an interest in the property to the taxpayer for the purposes of the Income Tax Act would be its fair market value at the date the taxpayer acquired or could have acquired control of the interest in the property. Any appreciation in the value of the interest attributable to the period prior to such date would not be taxable under the Act, since such amount would be considered a "windfall". For general comments on windfalls, you may refer to paragraph 3 of Interpretation Bulletin IT-334R2 "Miscellaneous Receipts".

We trust that our comments will be of assistance, but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transaction.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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