23 May 2002 Internal T.I. 2002-0127987 - Paragraph 85(1)(i)

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: Whether paragraph 85(1)(i) would apply where the taxpayer is resident in Canada at the time the property is transferred and the transferred property is a taxable Canadian property?

Position: Yes.

Reasons: See analysis in the memorandum.

May 23, 2002

Mr. Roger Sanson	International Section I
	International Audit Division	S. Leung
	Calgary Tax Services Office	952-4666
	220 - 4th Avenue South East, Suite 420
	Calgary AB  T2G 0L1
	2002-012798

Paragraph 85(1)(i) of the Income Tax Act (the "Act")

We are writing in reply to your e-mail of March 4, 2002 to Gilles Gosselin of our Directorate in which you requested our view as to whether the deemed provision of paragraph 85(1)(i) of the Act applies to a taxpayer regardless of his or her residence status. In other words, you enquired whether that paragraph would apply if the transferor of property is a resident of Canada.

The situation outlined in your e-mail is as follows:

1. A Canadian individual resident in Canada (taxpayer) owned all of the shares of a Canadian-controlled private corporation (CCPC).

2. In 2001, the taxpayer transferred shares of CCPC to a Canadian public corporation (Pubco) the shares of which are listed on the Toronto Stock Exchange in exchange for shares of Pubco. The transfer was made pursuant to subsection 85(1) of the Act.

3. But for the provision in paragraph 85(1)(i) of the Act, the shares of Pubco to the taxpayer would not otherwise qualify as taxable Canadian property (TCP) within the meaning of subsection 248(1) of the Act.

4. After the transfer, the taxpayer contemplates to emigrate to Bahamas.

The issue is whether the shares of Pubco are TCP to the taxpayer before and after the taxpayer ceases to be a resident of Canada. If the shares of Pubco were deemed through the operation of paragraph 85(1)(i) of the Act to be TCP, these shares will continue to be subject to Canadian taxation even after the taxpayer ceases to be a resident of Canada and becomes a resident of Bamahas. In other words, any gain on the disposition of these shares realized after emigration will continue to be subject to tax in Canada. If these shares are not TCP, such gain will not be subject to Canadian taxation. It should be noted that the deemed disposition of these shares under paragraph 128.1(4)(b) of the Act as a result of the taxpayer ceasing to be a resident of Canada would have no bearing on the characterization of these shares as TCP.

Our Comments

The issue of whether a resident of Canada could be considered owning a TCP has a long history in our Directorate dating back at least to 1985. On May 31st of that year in a technical interpretation letter issued to XXXXXXXXXX, we offered our view that the term "taxable Canadian property" was relevant only to non-residents. However, shortly before that time, an advance income tax ruling, dated XXXXXXXXXX, 1985, was provided to XXXXXXXXXX that the trust which was at that time a resident in Canada would not be deemed by subsection 48(1) to have disposed of certain XXXXXXXXXX shares when it ceased to be resident in Canada because those shares would constitute TCP under paragraph 85(1)(i) and former subparagraph 115(1)(b)(iii) of the Act.

The issue came up again in the advance income tax ruling issued in 1991 regarding XXXXXXXXXX (the "Trust") (the 1991 Ruling). As you are aware, that ruling was the subject of scrutiny by the Auditor General in 1995 and was reported, without disclosing the identity of the taxpayers involved, widely by the media. In that ruling request, the taxpayer represented to the Department as part of the facts that the XXXXXXXXXX shares received by the Trust (which was a resident of Canada at the time of the exchange of property) as the result of the exchange of its shares of XXXXXXXXXX (i.e., shares of a private company that it owned which were TCP) in XXXXXXXXXX were TCP of the Trust pursuant to paragraph 85(1)(i) and former subparagraph 115(1)(b)(ix) of the Act. Because of this ruling request, the issue was discussed in the Policy Review Committee of this Directorate and was a subject of XXXXXXXXXX an inquiry with the Department of Finance. In a letter dated December 23, 1991 to the Department, Mr. R.A. Short, the then Director General, Legislative Division of the Department of Finance, advised that paragraph 85(1)(i) was intended to apply to both resident and non-resident taxpayers. XXXXXXXXXX Subsection 97(2) provides a tax-free rollover of property to a partnership which immediately after the time of transfer of property is a Canadian partnership of which the transferor is a member. Given that a Canadian partnership means a partnership all the members of which have to be resident in Canada, the expression "taxable Canadian property" as used in paragraph 97(2)(c) can only have meaning if it applies to a resident. Consequently, the Department of Finance stated that with respect to paragraph 85(1)(i) the policy intent was to have gains with respect to such property continue to be subject to Canadian tax except to the extent provided otherwise by a tax treaty, irrespective of the residence of a taxpayer at the time such property is disposed of by the taxpayer.

XXXXXXXXXX Nevertheless, the Department decided to adopt a position which was consistent with the view of the Department of Finance XXXXXXXXXX This position was expressed in a technical opinion letter issued on July 11, 1995 (E9419645) which stated that "the Department's current position is that paragraph 85(1)(i), paragraph 85.1(1)(a) and subsection 87(4) are intended to apply to both resident and non-resident taxpayers and, therefore, a taxpayer resident in Canada can be viewed as having disposed of a taxable Canadian property for the purposes of the deeming rules of such provisions".

In addition, in the correspondence with the Auditor General Office in 1995 and 1996 regarding their enquiries of the 1991 Ruling noted above, the Department upheld that position by stating the following:

"It remains our view that the public company shares in the 1991 Ruling are taxable Canadian property. As previously explained to you, where a taxpayer transfers taxable Canadian property to a "Canadian partnership" in exchange for an interest in that partnership, paragraph 97(2)(c) of the Act deems that partnership interest to be taxable Canadian property. Since a Canadian partnership is defined in section 102 of the Act as a partnership in which all of the partners are residents, this provision makes it clear that a resident can own taxable Canadian property."

Subsequently, in the October 2, 1996 Notice of Ways and Means Motion regarding taxpayers' migration, the Department of Finance acted to put any doubt to rest on such issue by stating that "it be clarified that property may be taxable Canadian property of any taxpayer, whether the taxpayer is a Canadian resident or a non-resident".

In the December 1998 Explanatory Notes regarding the migration rule and again in the March 2001 Explanatory Notes, the Department of Finance stated that "the term [taxable Canadian property] is used for a variety of purposes, mostly but not exclusively to do with the taxation of non-residents and migrants". (Emphasis added)

The intention of the Department of Finance as expressed in the 1996 Notice of Ways and Means Motion noted above regarding whether the term "taxable Canadian property" is applicable to a resident of Canada is subsequently reflected in the Technical Bill of 2001 by:

1. the removal of those controversial words noted above in former subsection 133(8), paragraph 133(1)(c) and subparagraph 128.1(1)(b)(i) of the Act; and

2. the addition of certain words in some provisions of the Act. For example, the post-amble of the definition of "taxable Canadian property" in subsection 248(1) of the Act states in part: "and, for the purposes of section 2, subsection 107(2.001) and sections 128.1 and 150, and for the purpose of applying paragraphs 85(1)(i) and 97(2)(c) to a disposition by a non-resident person, includes ..." (Emphasis added). Note that the words "by a non-resident person" imply that paragraphs 85(1)(i) and 97(2)(c) of the Act are generally applicable to both a resident and a non-resident person. If these paragraphs are only applicable to non-resident persons, there is no need to specify "by a non-resident person". The reason for specifying the non-resident person is that Canada wants to retain the right to tax a non-resident person who has, pursuant to subsection 85(1) or 97(2) of the Act, exchanged property described in (m) to (q) of the definition of "taxable Canadian property" in subsection 248(1) of the Act for property which would otherwise not be considered to be taxable Canadian property.

Summary

From the analysis shown above, it is clear that the term 'taxable Canadian property" is applicable to both a resident and a non-resident person. Therefore, it is our opinion that paragraph 85(1)(i) of the Act could apply at the time when the taxpayer is a resident of Canada and, consequently, the property received by that taxpayer in exchange for the transferred property which is a TCP would be deemed to be a TCP under that paragraph of the Act. In other words, in the situation outlined in your e-mail, the shares of Pubco are TCP to the taxpayer before and after he ceases to be a resident of Canada.

If you have any questions regarding the above, please do not hesitate to contact us.

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

??