16 November 1987 Income Tax Severed Letter 5-3948 - [871116]

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.

Attention: XXXX

K.B. Harding (613) 957-2129

November 16, 1987

Dear Sirs:

This is in reply to your letter of September 22, 1987 concerning the treatment of a transfer of shares by an individual who is a resident of the U.S. to a U.S. trust and will follow-up your letters of May 19 and June 12, 1987.

You have questioned whether the transfer of common shares of a Canadian company, which transfer qualifies as a disposition of property for Canadian tax purposes, by XXXX would be exempt from capital gains tax in Canada by virtue of paragraph 4 of Article XIII of the Canada-U.S. Income Tax Convention (Convention).

Paragraph 1 of the Article XIII of the Convention states:

"Gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in the other State."

Paragraph 3(b)(iii) of Article XIII of the Convention defines real property to include:

"A share of the capital stock of a company, the value of whose shares is derived principally from real property situated in Canada."

It is a question of fact whether or not the shares in question qualify as real property as defined above. In determining whether or not the shares qualify as real property we would suggest you determine whether or not the fair market value of the shares is derived principally from real property situated in Canada. For this purpose, the word "principally" means more than 50 per cent is derived from real property situated in Canada.

Where, however, the shares being transferred to the trust do not qualify as a real property, it is our opinion that such shares would fall within paragraph 4 of Article XIII and will be exempt from tax in Canada provided paragraph 5 of that Article does not override the former paragraph.

It should be noted that the above position does not in any way change the position set out in our advance income tax ruling issued on March 24, 1987 but merely indicates that if the transfer of the shares does constitute a disposition of those shares, how any capital gains which arise will be treated under the Canada-U.S. Income Tax Convention.

We trust these comments will be useful for your purposes.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch