21 May 2002 External T.I. 2002-0126445 - Deemed disposition as subsequent

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: Has property subject to a deemed disposition under paragraph 128.1(1)(b) of the Income Tax Act been "subsequently disposed of" for purposes of subsection 220(4.5)?

Position:     		Yes 

Reasons: No basis in subsection 220(4.5) for excluding deemed dispositions

XXXXXXXXXX 							2002-012644
T. Cook
May 21, 2002

Re: Deemed Disposition of Property Upon Becoming Resident

Dear XXXXXXXXXX:

We are writing in reply to your letter of March 1, 2002. In the hypothetical situation you presented, an individual ceased to reside in Canada and under paragraph 128.1(4)(b) of the Income Tax Act (the "Act") was deemed to have disposed of each of his or her properties (subject to certain exceptions) for their fair market value. Pursuant to subsection 220(4.5), the individual elected to post security. This election effectively deferred the tax liability on each property until it was subsequently disposed of. The individual later returned to reside in Canada, and under paragraph 128.1(1)(b) was deemed to have disposed of each of his or her properties (subject to certain exceptions) for their fair market value.

You query whether the deemed disposition that occurs under paragraph 128.1(1)(b) is a disposition such that property has been "subsequently disposed of" for purposes of subparagraph 220(4.5)(a)(i) of the Act. If this is the case, the returning individual would be required to pay the tax for which security was posted even though there still has been no actual disposition of property.

Although the former resident may elect under subsection 128.1(6) to "unwind" the deemed dispositions, the limitations in the election mean that it may not be effective in eliminating all tax liability in some circumstances. This might occur under paragraph 128.1(6)(c) where, upon returning to Canada, the fair market value of property that is not taxable Canadian property is less than the gain the taxpayer would have realized upon initially leaving Canada. You argue that the returning individual in that instance would be worse off than had he or she remained non resident.

Our Comments

At a technical level, there is no basis in the wording of subparagraph 220(4.5)(a)(i) for distinguishing deemed dispositions from other dispositions. We also note that there are other deemed dispositions within the Act that, in our view, should clearly be subsequent dispositions for purposes of subsection 220(4.5). For example, the deemed disposition upon death in subsection 70(5) is a taxable event, and as such should have similar effect with respect to security posted under subsection 220(4.5). Our view is that a deemed disposition under paragraph 128.1(1)(b) is a subsequent disposition for purposes of subsection 220(4.5). The opening words in subsection 128.1(1) are "For the purposes of this Act".

Your letter really raises a policy concern with respect to the operation of subsection 128.1(6), in particular the fact that a full elimination of tax may not occur in all circumstances. The technical notes to subsection 128.1(6) demonstrate that in drafting the provision, the Department of Finance was fully cognizant of its interaction with the security posting provisions in subsection 220(4.5). Moreover, it is not clear to us that the operation of the provision is illogical from a policy perspective. The election is simply designed to ensure that in the situation described above an individual cannot reduce his or her adjusted cost base in a property below zero. Therefore, we would encourage you to raise your policy concerns directly with the Department of Finance.

We trust that these comments are of some assistance to you. As stated in paragraph 22 of Information Circular 70-6R4, the opinion expressed in this letter is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch