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: Whether a taxpayer can apply subsection 128.1(8) in respect of a property that was taxable Canadian property upon emigration, but not at the time of the actual post-emigration disposition?
Reasons: Subsection 128.1(8) requires that the property be taxable Canadian property at the time of the actual disposition.
October 24, 2013
Re: Subsection 128.1(8)
We are writing in response to your email of April 23, 2013, in which you requested the Canada Revenue Agency's views regarding the application of subsection 128.1(8) in respect of the disposition of property that was formerly "taxable Canadian property" ("TCP") pursuant to its definition in subsection 248(1) of the Income Tax Act (the "Act").
In particular, you described a hypothetical situation where an individual ("Mr. X") emigrated from Canada after October 1, 1996, at a time when he owned certain property (the "Property") that was considered TCP. At that time, the fair market value ("FMV") of the Property exceeded its adjusted cost base to Mr. X. As a result of his emigration, Mr. X was subject to a deemed disposition of the Property under paragraph 128.1(4)(b), such that the gain on the Property was subject to tax in Canada in the year of emigration. Mr. X elected to defer the payment of tax resulting from the deemed disposition pursuant to subsection 220(4.5). Subsequent to his emigration, the Property is sold for proceeds of disposition that are less than the FMV of the Property at the time of the earlier deemed disposition. Further, you note that, at the time of its actual disposition, the Property is no longer considered TCP as a result of a change in legislation that took effect after the date of Mr. X's emigration. You have asked whether Mr. X can apply subsection 128.1(8) in respect of the post-emigration loss realized on disposition of the Property.
This technical interpretation provides general comments to assist you in determining the income tax treatment of your particular fact situation. The income tax treatment of specific transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
When a taxpayer emigrates from Canada, the taxpayer is generally deemed to dispose of certain property prior to emigration for Canadian income tax purposes, pursuant to paragraph 128.1(4)(b). Under this rule, the relevant property is generally deemed to be disposed for proceeds equal to its FMV at that time. Post emigration, an actual disposition of such property would not generally be subject to further taxation in Canada. However, in certain circumstances, such as where the property in question is considered to be TCP, a post-emigration disposition by a non-resident taxpayer may give rise to further Canadian tax consequences.
As you have noted, subsection 128.1(8) may provide relief, in certain circumstances, to an individual (other than a trust) who disposes of TCP at some time after the individual emigrated from Canada, and where the TCP has declined in value from the time of emigration. Specifically, under subsection 128.1(8), an individual (other than a trust) who actually disposes of property that was previously subject to the deemed disposition on emigration under paragraph 128.1(4)(b), and that is considered to be TCP of the individual at the time of its actual disposition, may elect in writing in the income tax return for the taxation year that includes the actual disposition, to reduce the proceeds that were previously deemed to arise under paragraph 128.1(4)(b) in respect of the property. Under the election, the proceeds under the prior deemed disposition may be reduced by the lesser of the amount of the gain arising under the deemed disposition, the amount of the loss that would otherwise arise on the actual disposition of the property, or another amount specified by the individual in the election. In addition, the proceeds of disposition from the subsequent sale of the property are increased by a corresponding amount.
Based on the hypothetical situation that you described, we note that the property sold by Mr. X is not considered to be TCP at the time of its actual disposition, as is required under paragraph 128.1(8)(b). As such, the election described under subsection 128.1(8) would not be available to Mr. X.
We trust our comments are of assistance.
Robert A. Demeter, CPA, CGA
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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