4 March 2008 External T.I. 2007-0262551E5 - Disposition of taxable Canadian 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: 1. Is a capital gain realized by a non-resident of Canada (in this case, a U.S. resident) on the disposition of real property situated in Canada taxable in Canada? 2. Can the interest expense on a loan used to finance the purchase of the property be added to the cost of the property for the purpose of computing the capital gain from the sale of the property?

Position: 1. Yes. 2. No.

Reasons: 1. The capital gain is subject to tax under subsections 2(3) and 115(1) of the Income Tax Act and is not exempt under the Canada - U.S. Income Tax Convention. 2. Not permitted under the Act.

									2007-026255
XXXXXXXXXX 								D. Zhang
(613) 957-2104
March 4, 2008

Dear XXXXXXXXXX :

Re: Sale of Canadian Real Property by a Non-resident

We are writing in reply to your email addressed to the Department of Finance Canada concerning the income tax implications relating to the sale of real property in Canada. The message was forwarded to us for reply on November 19, 2007. We apologize for the delay in our reply.

You indicated in your message that you and your wife are residents of the U.S. and that you are considering purchasing a house and land (the "Property") in Canada as an investment and a vacation home. The purchase price will be financed, at least in part, with a loan. You have asked us to explain the Canadian income tax implications to you at the time you sell the Property. Specifically, you asked the following two questions:

1. Is any gain realized on the sale of the Property taxable in Canada (i.e., is the gain exempt from Canadian tax under the Canada-U.S. Income Tax Convention (the "Treaty"))? and

2. If the gain is taxable in Canada, can you add the interest on the loan to the cost of the Property in calculating the amount of the gain?

For purposes of responding to your questions, we have assumed that you and your wife are not in the business of buying and selling real estate and that the Property is not being acquired for speculative purposes. In other words, the Property is a "capital property" for Canadian tax purposes. In addition, we have assumed that you and your wife will not become residents of Canada at any time before you sell the Property.

Our Comments

This Directorate does not provide assurances regarding the tax consequences relating to proposed transactions that involve specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments.

A non-resident of Canada is subject to tax in Canada on any taxable capital gain realized from the sale of "taxable Canadian property". Taxable Canadian property includes, among other things, real property (i.e., land and buildings) situated in Canada. The Treaty provides relief from Canadian taxation for certain gains derived by a U.S. resident from taxable Canadian property. However, such relief is not available with respect to gains arising on the sale of real property. Accordingly, any taxable capital gain realized on the sale of real property situated in Canada will be subject to tax in Canada.

A taxable capital gain is equal to 1/2 of a capital gain realized on the disposition of a capital property (1/2 of the capital gain is not subject to tax). The capital gain is the amount by which the proceeds from the sale of the property exceed the total of the cost of the property and any outlays and expenses that are incurred for the purposes of making the sale. In addition, a non-resident who disposes of taxable Canadian property is required to file a tax return and to pay the balance of any applicable income taxes owing on or before April 30th following the year of disposition.

A non-resident individual who acquires real property situated in Canada for investment and vacation purposes is not entitled to add the interest expense on a loan used to acquire the property to the cost of the property for the purpose of computing any gain or loss from the sale of the property.

We would also point out that there are specific notification procedures and withholding requirements that apply to a non-resident vendor who sells taxable Canadian property. Under the Income Tax Act, a non-resident disposing of such property must notify the CRA about the disposition and remit (or post as security) an amount on account of the Canadian tax liability. When the CRA has received an amount (or appropriate security) to cover the tax on the taxable capital gain, the CRA will issue a certificate of compliance to the vendor (with a copy to the purchaser). If the purchaser does not receive the compliance certificate, the purchaser is required to remit a portion of the sale proceeds to the Canadian government. Any payments or security provided are credited to the vendor's tax account and a final settlement of tax will be made when the vendor's income tax return for the year is assessed. More information regarding this process can be found in Information Circular IC72-17R5, "Procedures concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116", available at the CRA website, under "Forms and Publications".

We trust that these comments are of assistance.

Yours truly,

Daryl Boychuk
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch