11 July 2001 External T.I. 2001-0083435 - ATRICLE XIII OF THE 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: Application of Article XIII of the Canada-U.S. Income Tax Convention and sections 116 and 245 of the Income Tax Act.

Position: Gain exempt under Article XIII of the Canada-U.S. Tax Income Convention. No certificate under section 116 of the Income Tax Act necessary.

Reasons: Technical Explanations regarding Article XIII of the Canada-U.S. Income Tax Convention and paragraph 2 of Interpretation Bulletin IT-173R2. Paragraph 50 of Interpretation Bulletin IT-474R, paragraph 64 of Information Circular IC 72-17R4 and documents # E 2000-0016667 and E 9606195.

XXXXXXXXXX 						2001-008343
							Éric Allard-Pouliot
July 11, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request : Article XIII of the Canada-U.S. Income Tax Convention

This is in reply to your facsimile of May 8, 2001, regarding the above-noted subject. More specifically, you have requested our opinion regarding the application of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention") and sections 116 and 245 of the Income Tax Act (the "Act") to the situation hereinafter described.

USco, a corporation resident of the United States, owns all the issued shares of two Canadian resident corporations, Opco and Realco. USco's adjusted cost base and paid-up capital of its shares of Opco and Realco is $100 each. Opco carries on an active business in Canada but owns no real property situated in Canada, whereas Realco's only asset is real property situated in Canada (land and building), which is rented to Opco for use in its active business. The fair market value of the shares of Opco and Realco is $1,000,000 and $500,000, respectively. In order to simplify its Canadian corporate structure, USco amalgamates Opco and Realco on a tax-deferred basis under section 87 of the Act to form a new Canadian resident corporation, Amalco, that will carry on the active business and own the real property. Subsequent to the formation of Amalco, an unexpected offer to buy the shares of Amalco for $1.5 million is received and accepted by USco.

In light of these facts, you require our opinion on the following issues:

Whether the gain realised by USco upon the disposition of its shares of Amalco would be exempt from Canadian income tax under Article XIII of the Convention.

Whether section 245 of the Act would apply to deny either the tax-free amalgamation of Opco and Realco or the subsequent disposition of the shares of Amalco.

Whether USco would be required to obtain a Certificate of Compliance under section 116 of the Act prior to the formation of Amalco.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments, which may be of assistance to you.

1. Article XIII of the Convention

Under the Convention, the general rule, as provided in paragraph 4 of Article XIII, is that gains derived in one country from the alienation of property owned by a resident of the other country is taxable only in the alienator's country of residence. However, there are several exceptions to this general rule. One of these exceptions is provided under paragraph 1 of Article XIII of the Convention. Pursuant to this paragraph, gains derived by a resident of one country from the alienation of real property situated in the other country may be subject to tax in the country where the real property is situated. In this regard, paragraph 3(b)(ii) of Article XIII provides that "a share of the capital stock of a company that is a resident of Canada, the value of whose shares is derived principally from real property situated in Canada" constitutes real property situated in Canada. In accordance with paragraph 2 of Interpretation Bulletin IT-173R2 and the Technical Explanation of the Convention, the term "principally" is to be construed as meaning more than 50 percent.

Consequently, where not more than 50 percent of the value of the shares of a corporation resident in Canada is derived from real property situated in Canada, such shares are generally not considered as real property situated in Canada for the purposes of paragraph 1 of Article XIII and the gain realized by a resident of the United States upon their disposition would be exempt from Canadian income tax pursuant to paragraph 4 of Article XIII of the Convention.

2. Section 245 of the Act

It is a question of fact whether the provisions of subsection 245(2) of the Act would apply to a specific transaction or series of transactions. Such a determination cannot be made unless all the circumstances surrounding the transactions and/or proposed transactions are provided. Since we do not have sufficient information to determine whether the transactions described in your letter are designed to circumvent a specific provision of the Act and whether they would amount to an avoidance transaction within the meaning of subsection 245(3), we are unable to comment on the potential application of subsection 245(2) of the Act to those situations.

3. Section 116 of the Act

The Canada Customs and Revenue Agency's (the "CCRA") position regarding the application of section 116 to an amalgamation to which subsection 87(4) of the Act is applicable is provided in paragraph 50 of Interpretation Bulletin IT-474R:

"By virtue of subsection 87(4), where the old shares were taxable Canadian property of a shareholder, the new shares are deemed to be taxable Canadian property of the shareholder. For this reason, it is the Department's view that a non-resident holder of shares of a predecessor corporation which constitute taxable Canadian property need not comply with the procedures set out in section 116 in respect of the deemed disposition of the old shares on an amalgamation to which subsection 87(4) is applicable"

This administrative position which predates the introduction of GAAR into the Act has been reiterated in paragraph 64 of Information Circular IC 72-17R4 and in subsequent technical interpretations (documents # E 9606195 and E 2000-0016667). Therefore, where a non-resident person is deemed, pursuant to subsection 87(4) of the Act, to have disposed of shares of a predecessor corporation which constituted taxable Canadian property, and subsection 245(2) does not apply, it is not necessary to obtain a Certificate of Compliance under section 116 of the Act in respect of that deemed disposition.

The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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