28 June 1989 Administrative Letter 57616 F - Returning to Canada and Filing U.S. Income Tax Return

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.

June 28, 1989

19(1)

This is in reply to your letter of February 27, 1989 wherein you requested our opinion with respect to the questions outlined below.

You indicate that you 19(1) .

You expect to return to Canada at some future date and wish to clarify certain matters in case you should return to Canada earlier than expected.

Your questions and comments are as follows:

(1)     19(1)

     Your company has advised you that a 30% U.S. withholding tax will be deducted from any interest earned by the plan and that an additional 10% penalty will apply as you have not reached the age of 59 & 1/2.  The penalty is levied as the Savings Plan is classified as a "defined contribution plan" under the Employee Retirement Income Security Act of 1974, under U.S. Income Tax laws.

     QUESTION:  As a non-resident citizen of Canada, you have questioned whether the Income Tax treaty between the U.S. and Canada would permit you to file an income tax return with the U.S. Government and reduce your tax liability to 15%, as it would if you were a resident of Canada?

(2)     You have been advised that upon termination with the company, the final payment of your Pension Plan lump sum settlement and the Savings Plan final payment may take up to 6 weeks to be paid.

     QUESTION:  When is one subject to Canadian income tax on these final payments from the company.  Is it (a) the day of termination from the company, or (b) the day you and your family actually returns to Canada?

     19(1)

(3)     You have been advised by a bank of Canada that non- resident citizens of Canada can purchase certain provincial, municipal, Government of Canada, and some specific industrial bonds (Bell Telephone), which are not subject to Canadian Government withholding taxes on interest earned by the bonds provided the bonds are at least five year bonds and an NR602 form is filed with the Canadian Government.

     QUESTION: Is the above information correct?  If the interest earned by the bond is not subject to withholding taxes in Canada, is the interest subject to any other taxes, if earned by a non-resident citizen of Canada?

(4)     An offshore banking institution has been advising Canadians to invest in non-resident trusts.  Their advice is that if a person has never previously been a resident in Canada for more than 60 months 19(1) , an established offshore non-resident trust would not be subject to Canadian income tax on interest earned by the trust, for up to 60 months after the beneficiaries of the trust become residents of Canada again.  They also advised against tax avoidance, but suggested proper planning of your financial affairs.

     QUESTION:  Is this bank correct in their advice to non- resident citizens of Canada, who may return to Canada at some future date?

(5)     19(1) under section 216 of the Canadian Income Tax Act.

     QUESTION:  If you return to Canada, you are concerned as to your income tax obligations on your return.  Whether you have to immediately file an income tax return on any capital appreciation realized on the difference between the purchase price in 19(1)  and the capital value of the house on the date you return to Canada.  You have questioned whether our opinion would be any different if your family was to continue renting the house, or take up residence in the house on your return to Canada?

We will reply to your questions in the order presented.

A.     In our view, the Canada - U.S. Income Tax Convention (the "Convention") is ONLY APPLICABLE to persons who are RESIDENTS of Canada or the United States.  If you receive an amount from a U.S. pension plan AFTER you become a resident of Canada, the Convention should be applicable to you.

     We are not aware of any provision in the Convention which would permit you to file an income tax return with the U.S. government in order to reduce your tax liability.  In our view, this question should be directed to the U.S.  Internal Revenue Service.

B.     The Income Tax Act (the "Act") provides for the taxation of world income when the individual becomes a resident of Canada.  However, it is always a question of fact when an individual establishes residential ties with Canada.   Paragraphs 6 to 9 and 16 of Interpretation Bulletin IT-221R2 outline the criteria used by Revenue Canada in making that determination.  It would be possible for an individual to establish residential ties with Canada prior to his physical presence in Canada.  We understand that the District Taxation Office in the area where you propose to reside is prepared to make a determination of when you will establish ties; however, this may not be possible until you are in a position to provide them with the information they require such as moving dates, availability of a home, etc.

C.     Subparagraphs 212(1)(b)(i) to (xi) of the Act provide for an exemption from withholding tax with respect to a payment of interest by a resident of Canada to a non-resident of Canada provided it meets the conditions set out therein.  Presumably, in your letter you are referring to interest referred to in subclauses 212(1)(b)(ii)(C)(I), (II) and (III) and paragraph 212(1)(b)(vii) of the Act. We are forwarding a copy of the paragraph 212(1)(b) of the Act for your perusal. Clause 212(1)(b)(ii)(C) of the Act states that bonds, debentures, notes, mortgages, hypothecs or similar obligations of the Government of Canada, government of a province or a municipality in Canada issued after April 15, 1966 will be exempt from withholding tax in Canada.  Subparagraph 212(1)(b)(vii) of the Act is probably applicable to Bell Telephone bonds if they meet all the conditions set out in that subparagraph.

D.     While it is possible that certain non-resident trusts may be exempt from tax in Canada on income earned in the trust for a period of up to 60 months after the beneficiaries become a resident of Canada, we cannot provide you with a firm reply without all the specific details of your situation.  However, we would be concerned in all situations as to the source of the funds used to invest in the trust to ensure that income of one individual is not being transferred to another by virtue of investing in an offshore trust.

E.     Since the house qualifies as taxable Canadian property there will be no deemed acquisition of property when you become a resident of Canada.

     If you continue to rent the property there will no change in use of the property and therefore no capital gain will arise until you dispose of the house or have a deemed disposition as a result of a change in use.  Since you acquired a house in Canada for the purpose of earning rental income and if you commence to use it as a principal residence on your return to Canada you will be deemed to dispose of the house at that later time and to have received proceeds equal to its fair market value.  You would also be deemed to acquire the house at the same fair market value.  Any capital gain as a result of the deemed disposition would be subject to tax.  However, you may elect, pursuant to subsection 45(3) of the Act, to defer recognition of the capital gain until the property is actually sold provided the home becomes your principal residence.

     In addition, you may also qualify for the capital gains deduction as described in chapter 3 of the attached "Capital Gains Tax Guide";  however, to qualify you must be a resident of Canada THROUGHOUT the year in which the capital gain arises.

On your return to Canada you will be deemed to acquire any capital property at the time you become a resident of Canada at a cost equal to its fair market value.  An exception to this rule applies to taxable Canadian property which would include your house in Canada and the rule set out in the immediate preceding paragraph would apply to such assets.

We are enclosing the latest publications concerning the Interpretation Bulletins you requested together with the Immigrant's and Emigrant's Tax Guide and trust these explanations are adequate for your purposes.

D. Dalphyfor DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch