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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: (1) Does the Canada-US Income Tax Convention "fresh start" rule for gains apply to the disposition of real estate inventory? (2) Are non-resident executors of an estate required to obtain a 159(2) certificate when they propose to distribute real estate in Canada to the estate beneficiaries?
Position: (1) No (2) Yes
Reasons: (1) Real property to which Article XIII, paragraph 9 applies is limited to real property that represents a capital asset of the taxpayer. (2) Subsection 159(2) applies to all legal representatives, whether or not resident in Canada.
XXXXXXXXXX 2002-011797
October 28, 2002
Dear XXXXXXXXXX:
Re: Canada - U.S. Income Tax Convention; Section 159 ITA
We are writing in reply to your letter of January 9, 2002 wherein you requested our opinion on 2 questions.
Your requests appear to relate to proposed transactions or completed transactions. 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 70-6R5 ("IC-70-6R5") dated May 17, 2002. 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 general comments.
A. Your first question concerns the application of paragraph 9 of Article XIII of the Canada-United States Tax Convention (1980), as amended, (herein called the "1980 Treaty"). More specifically, we understand your question is whether the "fresh start rule" contained in that paragraph would apply to the profit on the sale of a vacant parcel of land that represents inventory of a resident of the United States who had no permanent establishment in Canada. In this regard you have referred to the sentence in the first paragraph of the Technical Explanation to paragraph 9, Article XIII of the 1980 Treaty, which reads as follows:
"In addition, paragraph 9 applies to a gain described in paragraph 1, even though such gain is also income within the meaning of paragraph 3 of Article VI."
In the Canadian Petroleum Tax Journal, Vol. 3, No. 2, Fall 1990, we published the following question and response in the Round Table:
"Question 33
Article XIII of the Canada-U.S. Income Tax Convention (1980) (the "Convention") provides a transitional relief provision regarding certain capital assets described therein. At the time the 1942 Canada-U.S. Income Tax Convention was put into force, what we now know as Canadian resource properties were viewed as capital property. In the interim certain definitions and tax treatment regarding what we now know as Canadian resource property have been introduced into the Income Tax Act. Canadian resource properties are now viewed as something other than capital assets. In interpreting and applying Article XIII, paragraph 9 of the Convention, will Revenue Canada afford Canadian resource property held by U.S. Persons the fresh start transitional relief rules contained in Article XIII, paragraph 9 of the Convention?
Answer
Paragraph 9 of Article XIII of the Convention may be applied by a U.S. resident to the disposition of those resource properties which would have been exempt from capital gains tax under Article VIII of the 1942 Canada-U.S. Income Tax Convention, i.e. as a result of the U.S. resident not having a permanent establishment in Canada, provided that such properties are not excluded by virtue of paragraphs 9(c), (d) and (e) of Article XIII of the convention."
In our view, the case of a vacant parcel of land that represents an inventory of the owner does not draw the same conclusion as given above for a resource property. We consider that the statement in the Technical Explanation referred to, that "paragraph 9 applies to a gain described in paragraph 1", is limited by the preamble to paragraph 9 to those gains that arise on the alienation of real property that represents a capital asset of the taxpayer.
B. Your second question concerns whether subsection 159(2) of the Income Tax Act (Canada) (herein called the "ITA") requires a clearance certificate to be obtained in a situation where all of the executors/trustees of an estate, who are not resident in Canada for the purposes of the ITA, propose to distribute to the ultimate beneficiaries of the estate, real property situated in Canada that is owned by the estate.
Subsections 159(2) and (3) ITA provide a mechanism to ensure the collection of taxes that are, or may reasonably be expected to become, payable by a taxpayer under the ITA before a distribution of any property of the taxpayer that has come into the possession of or under the control of legal representatives of the taxpayer. For this purpose, no distinction is made between legal representatives who are residents of Canada and those who are non-resident.
Accordingly, in the situation described, it is our view that subsection 159(2) ITA requires that the executors/trustees obtain a certificate that certifies the matters described in that subsection; that is, that all amounts for which the estate is or can reasonably be expected to become liable under the ITA at or before the time of the distribution and for the payment of which the executors/trustees are or can reasonably be expected to become liable in their capacity as such (ie. pursuant to subsection 159(1) ITA), have been paid or that security therefore has been accepted by the Minister. If such a certificate is not obtained the legal representatives are subject to the liability described in subsection 159(3) ITA.
The transfer of property to a beneficiary under a trust would also be a "disposition" of the property (within the meaning of paragraph (c) of the definition of "disposition" in subsection 248(1) ITA). Accordingly, where the property to be distributed by the executors/trustees is real estate situated in Canada, the estate will be required to apply for the appropriate certificate provided for in section 116 ITA. This certificate ensures that taxes are collected in respect of any gain and recapture of capital cost allowance realized on the disposition of the real estate situated in Canada.
The certificate issued under section 116 ITA is different than the certificate described in subsection 159(2) ITA, the latter of which is concerned with all outstanding taxes then payable or that may reasonably be expected to become payable at or before the time of the distribution by the taxpayer whom the legal representative represents.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5.
Yours truly,
for Director
International and Trust Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 1 -
2
- -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002