8 February 2001 External T.I. 1999-0009715 - Article XXI(6) of Canada-US Tax Convention

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: Where is the source of the capital gains when a taxpayer disposes of securities listed on a U.S. stock exchange by way of a gift to a U.S. charity?

Position: Generally, it is the place of residency of the donor.

Reasons: There is no particular place at which the securities are disposed of, so it is reasonable to consider the source of the capital gains to be place of residency of the owner of the securities.

XXXXXXXXXX 1999-000971
S. Leung
February 8, 2001

Dear XXXXXXXXXX:

Re: Paragraph 6 of Article XXI of the Canada-United States Income Tax Convention

We are writing in reply to your letter in which you requested a technical interpretation on whether taxable capital gains realized by a Canadian resident upon the making of a gift to a U.S. charity of securities which are listed on a U.S. stock exchange would be considered income arising in the U.S. for the purposes of Article XXI(6) of the Canada-United States Income Tax Convention (the "Convention").

You stated that paragraphs 3 and 4 of IT-395R indicate that in the case of capital property, the source of the capital gain or capital loss is usually the location at which the sale or disposition took place and generally, the place where a stock or bond is sold is the securities or stock exchange in which it is sold regardless of the location of the issuer's transfer office. It is your view that such position regarding the source of capital gains or capital losses should also apply to your situation involving a gift of capital property because it would have had the same result if the Canadian resident had sold the securities on the U.S. stock exchange and had donated the entire proceeds from such sale to a U.S. charity.

Our Comments

As the disposition of the securities in your case does not take place through a securities or stock exchange, it appears that the comments at the latter part of paragraph 4 of IT-395R (as opposed to the first part) are relevant to your situation where it is stated that "where a sale is not made through a securities or stock exchange, other factors ... should be considered in establishing where the sale is made".

With respect to your situation mentioned above, subparagraph 69(1)(b)(ii) of the Income Tax Act would apply which states that where a taxpayer has disposed of anything to any person by way of gift inter vivos the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value. In our view the source of the capital gains or losses on such disposition would generally be the place of residency of the donor.

Your situation has some similarities with the situation described in the technical opinion letter of February 13, 1997 (file #9632715) wherein a trust resident in Canada is being wound up and all of its assets are being distributed to its sole income and capital beneficiary who is a resident of the U.S. The trust assets consist mainly of U.S. securities listed on U.S. stock exchanges. The question is whether the taxable capital gains arising as a result of the fair market value disposition of the trust assets would be exempt from Part XIII tax pursuant to Article XXII of the Convention. To the extent that the amount of the taxable capital gains distributed by the trust arose outside Canada, such distribution would be exempt from tax in Canada under paragraph 2 of that Article. In that technical opinion letter, we opined that where U.S. securities have been disposed of by a Canadian trust on the winding up of that trust, the capital gains arising from that disposition would generally be considered to be income arising in Canada.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R4, this is not an advance income tax ruling and is therefore not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

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