2020 Ruling 2019-0801011R3 - Article 13(4) of the Treaty

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 capital gain on the disposition of shares of a XXXXXXXXXX. resident corporation by a XXXXXXXXXX resident individual is subject to tax in Canada where the value of the shares is derived principally from immovable property situated in Canada.

Position: No, provided the individual is regarded as a resident of XXXXXXXXXX pursuant to Article 4 of the Treaty.

Reasons: As a result of the non-application of Article 13(4) of the Treaty, the gain is only taxable in XXXXXXXXXX pursuant to Article 13(6).

XXXXXXXXXX
										2019-080101

XXXXXXXXXX, 2020

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling – Disposition of Shares and the Application of Article 13 of the Canada-XXXXXXXXXX Income Tax Convention

This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling (the “Ruling”) on behalf of the above-named Taxpayer.

We also acknowledge the information provided in subsequent correspondence and communication in connection with your Ruling request. The information that you provided to us is relevant to the Rulings provided only to the extent described herein.

We understand that, to the best of your knowledge and that of the Taxpayer, none of the Proposed Transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed tax return of the Taxpayer or a related person and:

i. being considered by the CRA in connection with such return;
ii. under objection by the Taxpayer or a related person; or
iii. the subject of a current or completed court process involving the Taxpayer or a related person; or

(b) the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated:

(a) all references to a statute are to the relevant provisions of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the “Regulations”);

(b) all terms and conditions used in this letter that are defined in the Act (or in the Regulations) have the meaning given in such definition;

(c) all references to monetary amounts are in Canadian dollars; and

(d) the singular should be read as plural and vice versa where the circumstances so require.

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to, as follows:

Definitions

“ACB” means “adjusted cost base” as that term is defined in section 54;

“Act” means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended to the date of this letter;

“arm's length” has the meaning assigned by subsection 251(1);

“capital gain” has the meaning assigned by subsection 39(1);

“capital property” has the meaning assigned by section 54;

“Child 1” means an individual who is a non-resident of Canada and who is a minor child connected by blood relationship with Mr. A, according to paragraph 251(6)(a);

“Child 2” means an individual who is a non-resident of Canada and who is a minor child connected by blood relationship with Mr. A, according to paragraph 251(6)(a);

“Child 3” means an individual who is a non-resident of Canada and who is a minor child connected by blood relationship with Mr. A, according to paragraph 251(6)(a);

“Children” refers to Child 1, Child 2 and Child 3 collectively;

“corporation” has the meaning assigned by subsection 248(1);

“CRA” means the Canada Revenue Agency;

“disposition” has the meaning assigned by subsection 248(1);

“excluded property” has the meaning assigned by subsection 116(6);

“FMV” means fair market value, which refers to the amount, expressed in money terms, that is the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm's length and under no compulsion to act and contracting for a taxable purchase and sale, expressed in terms of cash;

“Holdco” means XXXXXXXXXX, a corporation incorporated and resident in XXXXXXXXXX;

“Minister” has the meaning assigned by subsection 248(1);

“Mr. A” means XXXXXXXXXX, a non-resident of Canada;

“non-resident” means a person that is not a resident of Canada for purposes of the Act and the Treaty;

“proceeds of disposition" has the meaning assigned by section 54;

“Property” means the property that is owned by Holdco that is vacant land located in XXXXXXXXXX, Canada;

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;

“related persons” has the meaning assigned by subsection 251(2);

“Rulings” means the rulings provided under the Rulings section of this letter;

“share” has the meaning assigned by subsection 248(1);

“taxable capital gain” has the meaning assigned by section 38;

“taxable Canadian property” has the meaning assigned by subsection 248(1);

“Treaty” means the XXXXXXXXXX;

“treaty-exempt property” has the meaning assigned by subsection 116(6.1);

“treaty-protected property” has the meaning assigned by subsection 248(1);

Our understanding of the Facts and Representations, the Proposed Transactions and the Purpose of the Proposed Transactions is as follows:

Facts and Representations

1. Mr. A is a non-resident of Canada and has no social, residential or economic ties to Canada, other than the indirect ownership of the Property through his ownership of the Holdco shares. Mr. A has never been a resident of Canada for purposes of the Act.

2. Mr. A is XXXXXXXXXX years old and is retired. He has lived in XXXXXXXXXX since XXXXXXXXXX and is a XXXXXXXXXX national. His primary residence and centre of vital interests are in XXXXXXXXXX. Mr. A’s wife and Children also live in XXXXXXXXXX. Mr. A is a tax resident of XXXXXXXXXX in accordance with XXXXXXXXXX domestic tax law and is subject to regular income taxation in XXXXXXXXXX on his worldwide income in accordance with the tax legislation in XXXXXXXXXX. Mr. A has not elected to be, and will not elect to be, taxed in XXXXXXXXXX for the taxation year in which the Proposed Transactions will occur.

3. You have represented to us that Mr. A is a resident of XXXXXXXXXX for purposes of the Treaty pursuant to Article 4(1) and that XXXXXXXXXX of the Treaty would not apply to Mr. A. You have also indicated that Mr. A will be subject to income taxes in XXXXXXXXXX.

4. Mr. A has three children, Child 1, Child 2 and Child 3. All of the Children are under the age of 18 and are tax residents of XXXXXXXXXX. We understand that in XXXXXXXXXX, minors have the capacity to legally acquire shares and may make notifications to the Minister under subsection 116(5.02) of the Act.

5. At the time of the Proposed Transactions, Mr. A and the Children will all be non-residents of Canada for purposes of the Act.

6. Holdco was incorporated on XXXXXXXXXX under the XXXXXXXXXX for the initial purpose of holding land investments in the XXXXXXXXXX. Holdco is classified as a XXXXXXXXXX under the XXXXXXXXXX. Holdco's head office is located in XXXXXXXXXX.

7. You have represented to us that Holdco is a resident of XXXXXXXXXX. for XXXXXXXXXX. tax purposes. Holdco is not a resident of Canada for purposes of the Act or for purposes of the Treaty. At no point in time has Holdco carried on a business in Canada for purposes of the Act.

8. Since Holdco’s incorporation, Mr. A has continuously been the legal and beneficial owner of all of the issued shares of Holdco, such shares having a XXXXXXXXXX. All decisions relating to Holdco are made by Mr. A. The shares of Holdco constitute capital property to Mr. A. The ACB of the Holdco shares to Mr. A is XXXXXXXXXX.

9. At the time of the Proposed Transactions, the only assets that will be owned by Holdco are the Property and cash of approximately XXXXXXXXXX.

10. The Property was purchased by Holdco in XXXXXXXXXX and has continuously been owned by Holdco since that time. The Property was purchased for XXXXXXXXXX and is estimated to have a current FMV of XXXXXXXXXX. Holdco funded the acquisition of the Property using the proceeds from the disposition of land investments situated in XXXXXXXXXX.

11. At the time of purchase, the Property was subject to XXXXXXXXXX. The Property was acquired as part of a wealth preservation and diversification strategy as a long term investment asset. Neither Mr. A nor Holdco had any intention of developing or building on the Property nor has Holdco requested an application for rezoning of the Property. As the Property does not earn income, Holdco has not filed any income tax returns under the Act.

12. Based on the foregoing description of Holdco’s assets, the shares of Holdco will be taxable Canadian property at the time of the Proposed Transactions, since at one or more times during the 60 month period ending at the time of the Proposed Transactions, more than 50% of the FMV of the Holdco shares will be derived directly or indirectly from real or immovable property situated in Canada.

13. Upon completion of the Proposed Transactions, Mr. A will not have any ongoing legal or beneficial ownership in the shares of Holdco. Following the completion of the Proposed Transactions, the Children will be the legal and beneficial owners of the Holdco shares.

14. As a result of the Proposed Transactions there will be a disposition of the shares of Holdco by Mr. A for purposes of the Act.

Proposed Transactions

15. In XXXXXXXXXX, Mr. A will gift XXXXXXXXXX% of his shares of Holdco to his Children, in equal proportions. The gifts will be formally documented through a written act of gift and no consideration will be received by Mr. A from his Children.

Purpose of Proposed Transactions

16. Mr. A is retired and wishes to put his affairs in order for estate planning purposes. Mr. A intends to pass assets on to his Children to secure their inheritance.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above and that there are no other transactions which may be relevant, we rule as follows, in reliance on such statements and subject to the comments below:

A. Provided that XXXXXXXXXX Mr. A is regarded as a tax resident of XXXXXXXXXX by virtue of Article 4(1) of the Treaty, the capital gain realized by Mr. A on the disposition of the Holdco shares will not be subject to tax under Part I of the Act pursuant to Article 13(6) of the Treaty and subsection 115(1).

B. Provided that the Children file the notifications required by subsection 116(5.02) in respect of the acquisition of the Holdco shares, such shares will constitute treaty-exempt property, and therefore excluded property, such that Mr. A will not be required to comply with the requirements of subsection 116(3) in respect of the disposition of such shares.

The above Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R9, Advance Income Tax Rulings and Technical Interpretations, dated April 23, 2019, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

The above-noted Rulings are based on the Act, the Regulations and the Treaty in their present form and do not take into account any proposed amendments thereto, which, if enacted, could have an effect on the rulings provided herein.

Other Comments

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or made any determination in respect of:

(a) the FMV or ACB of any property referred to herein, or whether the shares of Holdco constitute capital property of Mr. A;

(b) the residence of the Children or of Holdco for purposes of the Act and the Treaty;

(c) the residence of Mr. A for purposes of the Act and the Treaty, including the facts and circumstances relevant to the determination of Mr. A’s residence under Article 4(1) XXXXXXXXXX of the Treaty;

(d) the potential application of subsection 245(2) to re-determine the tax consequences confirmed in the Rulings;

(e) any tax consequences relating to the Facts and Representations and Proposed Transactions described herein, other than those specifically described in the Rulings; or

(f) any other filing obligations that may arise under the Act for Mr. A, Holdco or the Children as a result of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch