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.
Principal Issues: Tax treatments of certain income from and disposition of shares of taxable Canadian corporations.
Reasons: According to the law.
XXXXXXXXXX 2004-005470
S. Leung
April 13, 2004
Dear XXXXXXXXXX:
Re: Dividends, Interest and Capital Gains
We are writing in reply to your letter of December 22, 2003 that you mailed to the XXXXXXXXXX Tax Services Office requesting the Canada Revenue Agency's views on the tax treatments of various transactions outlined in your letter and the e-mail correspondences attached thereto. Your letter has been forwarded to us for reply.
Our understanding of the facts is as follows.
XXXXXXXXXX.
The Canada Revenue Agency ("CRA") does not provide information in the nature of tax advice. Due to the complexity of your personal tax situation, we suggest that you consult with a Canadian tax professional. However, we offer some comments that should be of assistance to you.
In the comments below, we assume that all the shares of the corporations mentioned above did not constitute "taxable Canadian property" as that term is defined in subsection 248(1) of the Act. If the above assumption is not correct, the tax consequences described below may be different.
Also, it is a question of fact whether you were or were not a resident of Canada in those periods described in facts #4 and #8 above. In the comments below we assume that you were not resident in Canada during these periods. However, the comments below should not be construed that the CRA has agreed or confirmed that you were not resident in Canada in those periods of time. Physical absence from Canada during a period of time does not automatically cause a person to be a non-resident of Canada for Canadian income tax purposes. To learn more about the factors that should be considered in determining the residency status of an individual, please refer to Interpretation Bulletin IT-221R3, which you can find in the website: http://www.ccra-adrc.gc.ca/E/pub/tp/it221r3-consolid/README.html.
On XXXXXXXXXX when you ceased to be a resident of Canada, the XXXXXXXXXX shares of XXXXXXXXXX that you owned at that time would be deemed to have been disposed of at their fair market value immediately before that time and reacquired at that value immediately after that time. Assuming no election has been made pursuant to former paragraph 48(1)(c) of the Act with respect to such deemed disposition, capital gains, if any, in respect of such deemed disposition should be reported on your XXXXXXXXXX T1 income tax return.
During the period between XXXXXXXXXX in which you were not resident in Canada, XXXXXXXXXX paid dividends-in-kind in the form of XXXXXXXXXX shares of each of XXXXXXXXXX. Assuming XXXXXXXXXX was a corporation resident in Canada at the time the dividends-in-kind were paid, Canadian withholding taxes of 25% on such dividends should have been withheld and remitted to the Government of Canada. However, if you were at that time a resident of Indonesia for the purposes of the Canada-Indonesia Income Tax Convention (the "Convention"), the withholding rate would be 10%. It is a question of fact whether you were a resident of Indonesia for the purposes of the Convention. Physical presence in Indonesia during that period of time does not necessarily mean that you were a resident of Indonesia for the purpose of the Convention.
What was described above would also apply to the dividend-in-kind you received from XXXXXXXXXX in the form of XXXXXXXXXX shares of XXXXXXXXXX on XXXXXXXXXX.
When you became a resident of Canada on XXXXXXXXXX, you were deemed to have disposed of the shares of XXXXXXXXXX at fair market value immediately before that time and reacquired them immediately after that time. As a result, the cost to you of these shares would be equal to their respective fair market value at that time.
On the sales of all the shares of XXXXXXXXXX that you owned in XXXXXXXXXX, capital gains net of capital losses, if any, in respect of the disposition of these shares should be reported on your XXXXXXXXXX T1 income tax return. As these shares were deemed to have been acquired at a cost equal to the fair market value on XXXXXXXXXX (see paragraph above), the gains or losses likely will be nominal.
Immediately before you ceased to be a resident of Canada on XXXXXXXXXX, your XXXXXXXXXX shares of each of XXXXXXXXXX were deemed to have been disposed of at their fair market value at that time and reacquired at that fair market value immediately after you ceased to be resident in Canada. Assuming no election has been made pursuant to former paragraph 48(1)(c) of the Act with respect to such deemed disposition, capital gains net of capital losses, if any, in respect of the deemed disposition of these shares should be reported on your XXXXXXXXXX T1 income tax return. Again, it is the fair market value of these shares on XXXXXXXXXX that will determine their cost for purposes of computing any gains or losses arising from this deemed disposition upon leaving Canada.
When XXXXXXXXXX was struck from the register in XXXXXXXXXX, you were considered to have disposed of the shares of XXXXXXXXXX for proceeds of disposition equal to their fair market value at that time (which was probably nil). However, since you were not a resident of Canada at that time and since the shares of XXXXXXXXXX were not taxable Canadian property, such a disposition had no Canadian tax consequence to you.
On XXXXXXXXXX when you became a resident of Canada, the XXXXXXXXXX shares of each of XXXXXXXXXX that you owned were deemed to have been disposed of at their fair market value immediately before that time and reacquired by you at that value immediately after that time. As a result, the cost to you of these shares would be equal to their respective fair market value. The gains or losses arising from the deemed disposition would have no Canadian tax consequences.
The shares of XXXXXXXXXX ceased to trade on the stock exchange in XXXXXXXXXX. It appears that the corporation still exists and the corporation's website indicates that it is the company's intention to relist the company's shares on the XXXXXXXXXX. Therefore, it appears that there was no disposition of the XXXXXXXXXX shares of XXXXXXXXXX by you in XXXXXXXXXX.
A dividend of $XXXXXXXXXX from XXXXXXXXXX should be reported on your XXXXXXXXXX T1 income tax return, representing a special dividend you received in the form of the Note of US$XXXXXXXXXX and a cheque of $XXXXXXXXXX. The Note probably had an adjusted cost base equal to $XXXXXXXXXX (i.e., $XXXXXXXXXX minus $XXXXXXXXXX). If you have not reported such dividend, you should amend your XXXXXXXXXX T1 income tax return by filing a T1 Adjustment form to the CRA.
You should report interest income of US$XXXXXXXXXX on your XXXXXXXXXX T1 income tax return, representing interest earned from the Note in XXXXXXXXXX.
You should report interest income of US$XXXXXXXXXX on your XXXXXXXXXX T1 income tax return, representing income earned from the Note up to XXXXXXXXXX.
With respect to the Note which was redeemed by XXXXXXXXXX on XXXXXXXXXX, since the proceeds of disposition of the Note in Canadian currency were $XXXXXXXXXX (i.e., US$XXXXXXXXXX x 1.5201, the exchange rate at noon of XXXXXXXXXX according to the Bank of Canada) and since the adjusted cost base of the Note was $XXXXXXXXXX as noted above, you have realized a capital loss of $XXXXXXXXXX and such loss would be deemed to be nil under paragraph 39(2)(b) of the Act because it was less than $200.
You have asked what values that the CRA would use for the shares of XXXXXXXXXX on XXXXXXXXXX. The values would be the fair market values of these shares on those dates, which you may be able to find in the newspapers of those dates at the libraries or from your stockbroker.
Lastly, with respect to some of the transactions noted above which you claimed you did not have knowledge of until many days later due to the mix-up of your mailing address by the distributing agents of the corporations involved, you are still required to report these transactions and the income and capital gains earned or realized on your T1 income tax returns for the years these transactions occurred. In this regard, you are responsible to file with the CRA T1 Adjustment forms to amend those tax returns that you have already filed to duly reflect these transactions.
We trust you will find the above to be of assistance. If you have any questions regarding the above, please contact XXXXXXXXXX of the XXXXXXXXXX Tax Services Office. We have sent a copy of the letter to XXXXXXXXXX for her records.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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