26 February 1999 Ministerial Letter 9903518 - TAXABLE CANADIAN PROPERTY - EMIGRATION

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.

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to respond to a letter of February 3, 1999, from your Member of Parliament, XXXXXXXXXX, concerning the taxation of family trusts leaving Canada.

Under the Income Tax Act, residents of Canada who emigrate are treated as having disposed of all their property, other than certain Canadian sourced property referred to as taxable Canadian property, and must pay tax on any accrued gains on such property. Similarly, where a Canadian trust distributes capital property to a non-resident beneficiary, the trust is treated as having disposed of the property, unless it is taxable Canadian property, and must pay tax on any accrued gain. Taxable Canadian property is excluded as, subject to the provisions of Canada’s international tax treaties, Canada has retained the right to tax former Canadian residents on their capital gains on taxable Canadian property that they acquired while resident in Canada.

In the 1991 advance income tax ruling referred to by the Auditor General in his May 1996 report, which has been the subject of much media commentary, a Canadian trust proposed to emigrate from Canada. Shortly thereafter, the emigrating trust received shares in a public corporation from a second trust that was resident in Canada. Based on advice from the Department of Finance concerning the underlying tax policy and on legal advice from the Department of Justice, Revenue Canada accepted that the public corporation shares were taxable Canadian property, such that any accrued gain would not be taxed immediately, but Canada would, subject to treaty, tax any actual gain on the shares once it was actually realized.

The tax policy issues raised by the Auditor General in connection with this ruling were referred to the House of Commons Standing Committee on Finance for review. In its report, which was released on September 18, 1996, the Committee found that: under existing tax policy, Revenue Canada had no basis to refuse to issue rulings that clarified an acknowledged ambiguity in the Act; it was not possible to conclude that the rulings would result in any significant loss in tax revenues; and there was no suggestion of political or other interference in those rulings or any impropriety on the part of any official.

While the Committee found that the specific rulings referred to in the report were issued in accordance with the existing provisions of the Act, the majority of its members recommended that changes be made to the Act to address the tax policy issues. The Department of Finance responded to those recommendations on October 2, 1996, by announcing changes to the Act that would be effective as of that date. On December 23, 1998, the Honourable Paul Martin, Minister of Finance, released for public consultation detailed proposals to amend the income tax rules that apply when a person ceases to be resident in Canada or when a Canadian trust distributes property to a non-resident. These proposals are based on the changes announced on October 2, 1996, and are designed to enhance Canada’s ability to tax emigrants’ Canadian-source gains. If enacted as proposed, these changes will ensure that all persons, including trusts, who emigrate from Canada or transfer property from Canada, will pay tax on gains on most properties that have accrued up to the time of departure or transfer. Exceptions to this rule will include gains that accrue on Canadian real estate and Canadian business property, since Canada always retains the right to tax gains on the sale of this type of property.

I trust my comments will assist you in understanding the Department’s position on this matter.

		Yours sincerely,

		Bill McCloskey
		Assistant Deputy Minister
		Policy and Legislation Branch

T. Harris
957-2114
February 15, 1999
990351