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. How are capital gains, losses, and interest earned in a U.K. ISA treated for tax purposes in Canada?
2. Will investments in U.K. ISAs need to be reported on Form T1135?
3. Will there be a deemed disposition of the investments in the U.K. ISA when the individual emigrates from Canada?
Position: 1. They will be reported in the income of the individual who is now a Canadian resident and will be subject to taxation in Canada.
2. In this scenario, the investments held in the U.K. ISA fall into the definition of "specified foreign property" as defined in the Act. If the total cost amount of all the "specified foreign property" held by the individual at any time in the year exceeds $100,000, then Form T1135 will need to be completed.
3. In this scenario, there will be no deemed disposition of the investments in the U.K. ISA at the time of emigration from Canada, since the criteria in subparagraph 128.1(4)(b)(iv) of the Act are met.
Reasons: See reasons noted above.
December 5, 2013
Re: U.K. ISA held by a temporary resident of Canada
This is in reply to your e-mail dated April 14, 2013, wherein you requested our comments on how capital gains and losses, and interest earned in a U.K. Investment Savings Account (ISA) are treated for Canadian tax purposes and whether the investments in the U.K. ISA are considered reportable assets for T1135 purposes. You also asked us to confirm the treatment of the U.K. ISA if the individual were to emigrate from Canada. We apologize for the delay in responding to your e-mail.
You describe a hypothetical scenario where an individual opened an ISA while he was a resident of the U.K. We will assume that this individual has never been a resident of Canada at any time prior to the individual's immigration to Canada. Although there are different types of ISAs, we will assume for the purposes of our response that the individual has a Stock and Shares ISA with a bank in the U.K. Under U.K. tax law, an ISA is treated much like how a Tax Free Savings Account ("TFSA") is treated under Canadian income tax rules. A resident of Canada may have an ISA if he or she was formerly a resident of the U.K. and opened such an account at that time. It is our understanding that in a Stock and Shares ISA an individual may hold various types of investments, such as shares and corporate bonds issued by companies officially listed on a recognized stock exchange (as defined in subsection 1005(1) of the Income Tax Act of the U.K.) anywhere in the world. We will assume that the bonds and shares held in this case are not issued by companies resident in Canada. We will also assume that the ISA arrangement is not a trust for Canadian tax purposes.
You ask us to further assume that the individual then immigrated to Canada and became a resident of Canada for Canadian tax purposes. The individual continued to hold the investments in the ISA while he was a resident of Canada. We will assume the individual emigrates from Canada in the third year after his arrival in Canada.
It is our understanding that interest, dividends, gains, and losses earned in an ISA are not subject to taxation in the U.K. However, under the Canadian Income Tax Act ("Act"), Canadian residents (as determined based on the factors described in Income Tax Folio S5-F1-C1, Determining an Individual's Residence Status) must report their worldwide income, including income earned on investments held in the U.K., for Canadian tax purposes. As such, the interest received or receivable in the year from the investments in the Stock and Shares ISA must be included in the Canadian resident's income tax return pursuant to paragraph 12(1)(c) of the Act. Dividends received on shares of non-resident corporations held in the ISA will need to be included in income pursuant to subsection 90(1) and paragraph 12(1)(k) of the Act. In addition, capital gains and capital losses from the disposition of such investments held in an ISA must also be included in the individual's income for Canadian tax purposes pursuant to paragraph 3(b) of the Act. Note though that when funds are withdrawn from the Stock and Shares ISA, the funds withdrawn will not be subject to tax for Canadian income tax purposes.
Since the Stock and Shares ISA consists of bonds and shares of the capital stock of non-resident corporations, such assets would fall into the definition of "specified foreign property" in subsection 233.3(1) of the Act by virtue of (c) and (g) of that definition. Where an individual resident in Canada owns specified foreign property at any time in the year, and the cost amount to the individual of all the specified foreign property owned totals more than $100,000, then the individual must complete and file the Foreign Income Verification Statement (Form T1135). For more information on completing Form T1135, please consult the following link: http://www.cra-arc.gc.ca/E/pbg/tf/t1135/.
On immigration to Canada, paragraphs 128.1(1)(b) and (c) of the Act generally provide for a deemed disposition of the individual's property (other than property described in subparagraphs 128.1(1)(b)(i) to (v), not applicable to this scenario) immediately before the time of immigration to Canada for proceeds equal to fair market value, and a deemed reacquisition of such property at a cost equal to the proceeds of disposition. This results in each property getting a bump-up in the adjusted cost base for Canadian-tax purposes, thereby reducing the amount of capital gains when the particular property is disposed of in the future when the individual is resident in Canada. Moreover, the bump-up provided by paragraph 128.1(1)(c) of the Act will also increase the cost of the property for purposes of the limit in the definition of "reporting entity" in subsection 233.3(1) of the Act.
When the individual emigrates from Canada, there is generally a deemed disposition and reacquisition of all of the individual's assets at fair market value immediately before the time of emigration from Canada pursuant to paragraphs 128.1(4)(b) and (c) of the Act respectively. Normally, such an individual would have been deemed to have disposed of all their investments in the Stock and Shares ISA and any taxable capital gains or losses will need to be determined and included in the individual's income for Canadian tax purposes. However, it should be noted that subparagraph 128.1(4)(b)(iv) of the Act provides for an exception to the deemed disposition rule for short-term residents. Specifically, this exception provides that an individual, who was resident in Canada for 60 months or less during the 10-year period preceding the cessation of residence in Canada, is not deemed to dispose of any property that the individual owned on becoming resident in Canada. In this particular scenario, the exception in subparagraph 128.1(4)(b)(iv) of the Act is met, and there would not be a deemed disposition of an investment held in the Stock and Shares ISA at the time of the individual's emigration from Canada provided that the investment was held by the individual in the U.K. ISA at the time of immigration.
We trust these comments to be of assistance.
Olli Laurikainen, CPA, CA
Income Tax Rulings Directorate
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