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: Tax consequences on the sale of property that was previously seized during WWII. Tax treatment of payment received on account of the rent generated by the property while seized.
Position: Question of facts but in similar situations the cost of the property to the taxpayer would generally correspond to the property's fair market value on the day it was reacquired by the taxpayer and the return of the property in and by itself would not be taxable. As for the payment on account of rent, it could amount to damage the payment of which does not have to be included in income.
Reasons: Paragraph 69(1)(c). Documents # E 9226011, E 9226015, E 9228116, E 9329505, E 9600925, E 2002-017626A and E 2002-0176265.
November 4, 2003
Mrs. Suzanne L. Boyer Income Tax Rulings
ECC - Enquiries Call Centre Directorate
Canada Customs and Revenue Agency International and Trusts
Division
Éric Allard-Pouliot
Tel. 613-957-2097
2003-001511
Technical Interpretation Request
Possible capital gain on seized property during WWII
This is in reply to your Electronic Mail of April 24, 2002, regarding the above-noted subject. More specifically, you have requested our opinion as to the tax treatment applicable to the situation hereinafter described.
Facts
In your request you refer to a family property that was seized in 1937 by the Nazis in Germany. Following a claim made in 1980 to recover the seized property, the German government transferred the said property to a taxpayer residing in Canada in 2002, at which time the property had a fair market value ("FMV") of about $87,000.00 CDN. Later during that year the property was sold by the Canadian taxpayer for about $83,000.00 CDN. Prior to its sale, as well as prior to its transfer to the Canadian taxpayer in 2002, the property was used as a rental property. Prior to its transfer to the Canadian taxpayer, the German town of XXXXXXXXXX, which was formerly part of East Germany, handled the administration of the property. The Canadian taxpayer is currently trying to recover funds regarding the rent generated by the property prior to its transfer in 2002.
Having regards to these facts, you have requested our opinion as to what would be the tax treatment for the Canadian taxpayer on the disposition of the property in 2002 and in respect of sums received by him on account of the rent generated by the property while it was under seizure.
In accordance with paragraph 1 of Article 13 of the Canada-Germany Income Tax Convention, Canada has the right to tax the gains derived by a resident of Canada from the alienation of immovable property situated in Germany. Therefore, any difference between the proceeds of disposition of the property resulting from its sale by the Canadian taxpayer in 2002 over its adjusted cost base for the Canadian taxpayer, will result, for the purposes of the Income Tax Act (the "Act"), in a capital gain or loss, as the case may be, for the Canadian taxpayer.
In our view, for purposes of the Act, the cost to the Canadian taxpayer of the property returned to him from the German government would be the FMV of the said property on the date the Canadian taxpayer acquired both the legal and beneficial ownership of the property, i.e. in 2002 when the property was returned to him by the German government. Any appreciation in value of the property attributable to the period prior to such date would not be taxable under the Act (see documents # E 9226011, E 9226015, E 9228116, E 9329505 and E 9600925). Therefore, assuming the property was not sold to a person with whom the Canadian taxpayer was not dealing at arm's length (in which case paragraph 69(1)(b) of the Act would apply to deem the Canadian taxpayer to have received proceeds of disposition equal to the property's FMV), its sale by the Canadian taxpayer for about $83,000.00 CDN in 2002 resulted, for the purposes of the Act, in a capital loss for the Canadian taxpayer.
As for the tax treatment of the funds that could eventually be recovered by the Canadian taxpayer in respect of the rent generated by the property prior to its transfer in 2002, given the complex legal issues and the fact that all the facts and documentation pertaining to this specific case have not been made available to us, it is difficult to provide a definitive response. However, given the history of this matter, there are factors present that could lead to the conclusion that any such amount received by the Canadian taxpayer would represent a certain class of damages that is not taxable under the Act. Alternatively, such payment could also be exempted from tax pursuant to paragraph 81(1)(g) of the Act, assuming it is made by the Federal Republic of Germany or by a public body performing a function of government within that country as compensation to a victim of National Socialist persecution and no tax is payable in respect of that payment under a law of the Federal Republic of Germany that imposes an income tax. A review of the terms of the agreement in accordance with which such payment would be made would be necessary in order to reach a final conclusion as to the tax treatment of this amount for the Canadian taxpayer.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Yours truly,
Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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