CRA rules that a taxable capital gain from closing on a sale of Chinese private company shares in China “arose” in China

The taxpayer, who was a citizen of China, wished to sell his minority shareholdings in three private Chinese manufacturing companies to his mother (a citizen and resident of China) after he had become a resident of Canada. In accordance with the practices for sales of private company shares in China, the closing for the sale of the shares for cash would occur on the premises of the Chinese private companies.

Since the taxpayer is a non-resident of China for Chinese income tax purposes, he is taxed in China only on his Chinese-sourced income pursuant to the domestic Chinese income tax law. For these purposes, Income derived from the transfer of property located within China is deemed to be income sourced from China under such domestic law.

CRA ruled that:

• The taxable capital gain from the taxpayer’s disposition of his shares will be sourced to China for purposes of s. 126(1)(b) and the determination of “qualifying income” in ss. 126(7) and (9).
• To the extent that the gain arises in China under Chinese income tax law, the gain will be considered to have arisen in China under Articles 13(5) and 21(4) of the Treaty. (In this regard, the CRA summary states that, for the purposes of Article 13(5) of the Treaty, “the word ‘arise’ has the meaning that it has under Chinese income tax laws pursuant to Article 3(2) of the Canada-China Income Tax Treaty.”)

Neal Armstrong. Summary of 2024 Ruling 2023-0976381R3 under s. 126(1)(b).