9 January 2001 External T.I. 2000-0042545 - Immovable property

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: Whether a capital gain realized by a U.K. resident on the disposition of the shares of a private corporation resident in Canada that actively carries on a farming business in Canada would be exempt from taxation in Canada under Article 13 of the Canada-U.K. Treaty.

Position: Question of fact but if the value of shares of a Canadian corporation is derived primarily from real property in which the business of the corporation is carried on, such shares will not be immovable property for the purposes of Article 13 of the Canada-U.K. Treaty by virtue of paragraph 7(b) of Article 13 thereof.

Reasons: The law.

XXXXXXXXXX 2000-004254

Attention: XXXXXXXXXX

January 9, 2001

Dear Sir\Madam:

Re: Canada-United Kingdom Income Tax Convention ("Treaty") - Article 13

This is in response to your facsimile letter dated August 16, 2000, wherein you requested our opinion on the application of the above noted provision of the Treaty in the following situation.

You indicate that a person who is a resident of the United Kingdom ("non-resident") under the Treaty owns 25% of the shares of a private corporation that is resident in Canada ("Canco") under the Treaty. Canco carries on an active farming business in Canada and presently, more than 50% of the fair market value of its shares is derived from the land owned by Canco and used in its farming business. Your question is whether a capital gain realized by the non-resident on the disposition of the shares of Canco would be exempt from taxation in Canada under Article 13 of the Treaty.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following comments.

Under paragraph 5 of Article 13 of the Treaty capital gains arising from the alienation of shares of a corporation (other than shares quoted on an approved stock exchange) that derive their value or the greater part of their value (i.e., more than 50%) directly or indirectly from "immovable property" situated in a Contracting State, may be taxed in that State. The term "immovable property" is defined in paragraph 2 of Article 6 of the Treaty as having the meaning under the domestic law of the Contracting State in which the particular property is situated and includes, inter alia, "...property accessory to immovable property, livestock and equipment used in agriculture and forestry ...".

Notwithstanding the above, for the purposes of paragraph 5 of Article 13 of the Treaty, paragraph 7(b) of Article 13 provides that immovable property does not include any property (other than rental property), in which the business of the company, partnership or trust was carried on. Where the shares of a corporation do not derive their value or the greater part of their value from immovable property for the purpose of paragraph 5, any capital gain arising from the alienation of such shares will only be taxable in the Contracting State of which the alienator is resident by virtue of paragraph 8 of Article 13 of the Treaty unless paragraph 9 of Article 13 of the Treaty is applicable.

In summary, in the situation where the value of shares of a Canadian corporation is derived primarily from real property in which the business of the corporation is carried on, such shares will not be immovable property for the purposes of Article 13 of the Treaty by virtue of paragraph 7(b) of Article 13 thereof.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

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

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