13 January 2014 External T.I. 2013-0493911E5 - Death of a non-resident taxpayer

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 Canadian income tax implications on the death of a non-resident taxpayer who jointly owns property in Canada?

Position: General comments provided in respect of (i) the application of the deemed disposition rules to a non-resident taxpayer under subsection 70(5) of the Act (ii) the limitations in respect of the principal residence exemption and the spousal roll-over provisions under paragraph 40(2)(b) and subsection 70(6) of the Act respectively, as the deceased was not a resident of Canada at all relevant times.

Reasons: Words of the legislation.

XXXXXXXXXX
2013-049391
Kimberly Duval
(613) 946-3553

January 13, 2014

Dear XXXXXXXXXX:

We are writing this letter in response to your email correspondence to us of June 20, 2013, wherein you requested our comments concerning the Canadian income tax implications on the death of an individual.

More specifically, you have described a situation involving Mr. X, an individual who, at the time of his death, was married to Mrs. X. At that time, Mr. and Mrs. X were both considered to be non-residents of Canada for purposes of the Income Tax Act (the Act), and residents of Italy for purposes of the Canada-Italy Tax Treaty. At all times during the period of their Italian residency, Mr. and Mrs. X were the joint owners of a home in Canada that was occupied by their adult son.

In consideration of the above, you have asked whether the principal residence exemption would be available with respect to Mr. X's interest in the Canadian home, and whether it is possible to transfer the interest in the home to Mrs. X on a tax-deferred basis (i.e., a spousal roll-over) upon the death of Mr. X.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer 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.

Subsection 70(5) of the Act provides that as a result of death, a taxpayer is generally deemed to dispose of each capital property owned immediately before death for proceeds of disposition equal to the fair market value of the property at that time. However, in the case of a non-resident of Canada and subject to the provisions of Canada's tax treaties, subsection 70(5) of the Act would apply in respect of property that is taxable Canadian property, as defined in subsection 248(1) of the Act. Further, in the situation you describe, we are of the view that a subsection 70(5) deemed disposition of an interest in a home in Canada that was owned by a resident of Italy would be considered an "alienation of immovable property" for purposes of Article 13(1) of the Canada-Italy Tax Treaty, and therefore subject to tax in Canada. For further information in respect of the deemed disposition of capital property on death, including an election that may be available to defer the payment of the Canadian income tax arising from the deemed disposition, you may choose to consult our guide T4011, Preparing Returns for Deceased Persons.

In respect of the principal residence exemption provided by paragraph 40(2)(b) of the Act, we have previously stated in Income Tax Folio S1-F3-C2, Principal Residence, that the amount of the capital gain that is exempt from tax is based on the number of years in which the property is owned by the taxpayer and the number of years in which the property qualifies as the taxpayer's principal residence during which he was resident in Canada. As such, for purposes of this determination, while a property will not qualify as the taxpayer's principal residence for any year in which the taxpayer is not a resident of Canada, the amount of any capital gain that could be subject to tax in Canada remains a question that can only be determined in consideration of all relevant facts and circumstances that are applicable in any particular situation.

Finally, in respect of your question regarding the possible rollover of property to a spouse, we note that subsection 70(6) of the Act provides that a transfer of a taxpayer's capital property to a spouse or spousal trust as a result of the taxpayer's death may occur on a tax-deferred basis, in certain circumstances. However, the taxpayer must have been a resident of Canada immediately before death for this provision to apply.

We trust our comments will be of assistance to you.

Yours truly,

Robert Demeter, CPA, CGA
Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch