23 January 2006 External T.I. 2005-0125931E5 - Canadian resident selling foreign real property

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: What are the consequences of a Canadian resident owning real property in Croatia selling that property?

Position: Generally, any capital gain is taxable in Canada, whether such property is located in Canada or in another country, because Canada taxes its residents on their worldwide income. However, if any tax is paid to Croatia, this will give rise to a foreign tax credit in Canada.

Reasons: We provided only general comments as the question relates to a completed transaction.

2005-012593
XXXXXXXXXX Isabeau Morrissette
(613) 957-2118
January 23, 2006

Dear XXXXXXXXXX:

Re: Capital gain realized on a foreign property

We are writing in response to your letter dated March 9, 2005 wherein you asked us whether a capital gain realized on a foreign property (land in Croatia jointly owned by your wife and your two sons) is taxable in Canada. While we already offered you general comments regarding this question via email on April 20, 2005, you requested that we confirm our answer in an official letter from the Canada Revenue Agency.

Written confirmation of the tax implications inherent to particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

Generally, a person who is resident in Canada is subject to tax in Canada on all of his or her income (including capital gains) from all sources, including sources outside Canada, pursuant to sections 2 and 3 of the Income Tax Act (the "Act"). Therefore, any capital gain on the land located in Croatia and sold in 2004 must be included in your wife's and sons' income tax returns for 2004 (in proportion to their interests in such land). Assuming that your wife and sons are residents of Canada for the purposes of the Canada-Croatia Income Tax Agreement (the "Treaty"), Canada's right to tax any gain realized on the disposition of the land will be maintained. However, pursuant to Article 13 of the Treaty, Croatia will also be entitled to tax any gain arising on the disposition of the land. In such an event, Canada will provide a foreign tax credit to offset any income tax that they might have to pay to Croatia upon the disposition of the land.

Under the Act (Canada) a capital gain on the disposition of capital property is generally equal to the excess of the proceeds of disposition over the aggregate of the "adjusted cost base" of the property and any outlays and expenses made by the taxpayer for the purpose of the disposition. The adjusted cost base of a property is generally equal to the cost of the property to the taxpayer plus or minus certain adjustments (if applicable). However, where a taxpayer owns real property located in a foreign country at the time he becomes resident in Canada, the provisions of the Act provide that the taxpayer is deemed to have acquired such property at a cost equal to its fair market value at that time. In this way the capital gain that is taxed under the Act in Canada will generally not include any portion of a gain that accrued before the person became a resident of Canada.

We trust our comments are of assistance.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch