19 December 1986 Income Tax Severed Letter 5-2426 - [Canada-Switzerland Income Tax Convention]

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.

XXXX G. Thornley (613) 957-2130

December 19, 1986

Canada-Switzerland Income Tax Convention (the "Treaty")

This is in reply to your letter of October 29, 986 requesting a technical interpretation of the provisions of Article XIII of the above noted treaty in a hypothetical fact situation.

The facts as related are quite specific and appear to relate to a particular contemplated transaction. As assurance to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling as outlined in Information Circular 70-6R, we have not commented on the specific matters raised in your request. We are, however, prepared to comment on the general application of Article XIII of the Treaty and on subsection XXXX of the Income Tax Act (the "Act").

Our Comments

Under domestic law a resident of Canada who acquires property in another country and who subsequently leaves Canada may elect under subsection 48(1) of the Act to have the property deemed to be taxable Canadian property from the time immediately after he ceased to be resident in Canada until the time immediately after he disposes of it. The purpose of the election is to defer the payment of tax on any gain in value of the property from the time it was acquired until the date it is sold. In the meantime the taxpayer must furnish to the Minister acceptable security for the payment of any tax that would have been payable if he had not so elected. When the property is subsequently disposed, the then non-resident must comply with the provisions of Section 116 and in order to recover the security given under section 48 of the Act must file a return, as required under section 115 of the Act, reporting the sale of property and the resultant tax, if any. In our opinion the provisions of the above noted Treaty do not exempt the former Canadian resident from the tax owing on the gain referred to previously.

Paragraph 1 of Article XIII of the Treaty states that Switzerland may tax gains from the alienation of real property situated in Switzerland. The fact that Switzerland may tax the gain does not mean that Canada must give up the right to tax the gain on immovable property that has been subject to a section 48 of the Act election. According to the commentary to Article 23 of the OECD Model International Tax Treaty, where an exclusive right to tax is given to one of the Contracting States the relevant Article would state that the income or capital in question"shall be taxable only" in a Contracting State. As noted above this does not appear to be the case in the present instance.

In closing we note also that the alienation of real property is referred to in paragraph 1 of Article of the Treaty, paragraphs 4 and 5 of the said article are not relevant.

With respect to foreign tax credits, where the taxpayer in question is considered a resident of Switzerland at the time the alienation of immovable property situated in Switzerland takes place and the gain or such alienation is also taxable in Canada, it is to the Swiss that the taxpayer must look for any relief from double taxation. In this connection please see paragraph 2 of Article XXII of the Treaty.

We trust that our comments will be of some assistance to you.

Yours truly,

Wm. R. McColm for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch