10 September 2001 External T.I. 2001-0093035 - Canadian Taxation General Comments

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: Can we comment on the taxation of real estate gains earned through foreign corporations by a specific individual that may or may not be a resident of Canada?

Position: No.

Reasons: We do not have the individual's consent to discuss his or her tax matters with the writer. Consequently, only general comments were provided to the writer.

XXXXXXXXXX 2001-009303
M. P. Sarazin, CA
September 10, 2001

Dear Sir/Madam:

Re: Taxation of Residents of Canada on Their Worldwide Income

This is in reply to your letter of June 28, 2001, requesting general information regarding the general taxation of individuals that are considered residents of Canada.

You provided general information regarding a specific taxpayer that claims to be a resident of Canada but he or she is not paying taxes on his or her worldwide income because the income is being earned through corporations resident in a tax haven country.

Comments

The Canada Customs and Revenue Agency (the "CCRA") pamphlet titled "Newcomers to Canada" (T4055) will introduce readers to the Canadian income tax system as it relates to becoming a Canadian resident. We note that copies of CCRA publications, including Interpretation Bulletins, are available on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

Under the Income Tax Act (the "Act"), each Canadian resident is required to report his or her world income from sources both inside and outside Canada. The CCRA's general views regarding the determination of an individual's residence are found in the latest version of Interpretation Bulletin IT-221 entitled "Determination of an individual's residence status". Primary residential ties include the existence of a home (owned or rented) and the residence of the individual's spouse or common-law partner and dependants.

Secondary residential ties include provincial hospitalization and medical insurance coverage, a provincial driver's license, provincial vehicle registration, a mailing address in Canada, a telephone listing in Canada, landed immigrant status or appropriate work permits in Canada, a Canadian post office box and local newspaper and magazine subscriptions sent to a Canadian address. However, the determination of whether a particular individual is a resident of Canada at any particular time is a question of fact.

A person would become a resident of Canada for income tax purposes when he or she establishes sufficient residential ties in Canada. We note that an individual that is only a part-year resident is only required to report his or her world income for the part of the year that the person is resident in Canada. A taxpayer's world income would include any employment income, pension income, business income and investment income (foreign or Canadian) received during the relevant period. Reference should also be made to any relevant income tax conventions with regard to the taxation of foreign source income for a period that you are considered a resident of Canada. Generally (within specified limits), foreign income or profits taxes paid in respect of foreign source income will be creditable in the computation of your Canadian income taxes. Please refer to the CCRA Interpretation Bulletins and other publications on the website referred to above for additional information.

When an individual becomes a Canadian resident (i.e., immigrates to Canada), subsection 128.1(1) of the Act generally deems that individual to have disposed of each property owned by him/her immediately before that time for proceeds of disposition equal to the fair market value of the particular property at that time and to have re-acquired each such property so disposed of for a cost equal to the amount of the deemed proceeds. There are also similar deemed disposition rules when an individual ceases to be a Canadian resident (i.e., emigrates from Canada) in subsection 128.1(4) of the Act. The purpose of these deeming rules is to ensure that the appropriate amount of income or gain accrued from holding the property during the individual's Canadian residency period is subject to income tax in Canada.

Your understanding that, under the Canadian tax system, a Canadian resident is liable for income tax on their world income is correct. World income, as discussed above, includes employment income (including taxable benefits), retirement income, property income and gains and losses from the disposition of property. The Canadian tax system, like many other countries, also has a comprehensive controlled foreign corporation ("CFC") regime that, for the most part, prohibits the deferral or avoidance of Canadian income taxes by Canadian residents through the transfer of assets offshore. We note that the Act also includes specific legislative tax avoidance provisions that apply where a Canadian resident redirects his or her income to another person.

You have identified a particular individual who claims to be a resident of Canada that is not reporting his world income as required under the Act. We are not able to comment on tax issues relating to a specific taxpayer without the consent of that taxpayer. Assuming that the particular individual is in fact a Canadian resident (this issue may not be as clear cut as your letter suggests), the particular individual's non-compliance with the Act would have to be addressed by the Audit Section of the relevant tax services office. Consequently, your information will be forwarded to the relevant tax services office for its review.

We trust these comments will be of assistance and we thank you for bringing these concerns to our attention.

Yours truly,

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