2 August 1989 Ruling 58263 F - Treatment of Non-residents in Certain Situations

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.

August 2, 1989

19(1)

This is in reply to your letter of June 7, 1989 wherein you requested our opinion with respect to the treatment of non-residents in the following circumstances.

1.     Where a non-resident inherits a house from a Canadian resident who was using it as a primary residence, will it be necessary for a non-resident to pay estate taxes on the house?  If so, what is the tax rate?  Will it be necessary for a non-resident to pay capital gains tax on the house when it is sold?  How are the cost of the house and capital gains determined in this case?

2.     If the house mentioned above is gifted to a non-resident before death, is it then necessary for the non-resident to pay capital gains tax when it is sold?  What is the tax rate in this case and how is the capital gain determined?

3.     Of the two possibilities mentioned above, which is the most advantageous from a tax point of view?

4.     If a non-resident dies, are there estate taxes on his Canadian shares, bonds or house?  If so please send details.

We will respond to your questions in the order presented.

A.     It is our understanding that estate taxes have been abolished in all provinces in Canada; however, you may wish to confirm this fact with the Department of Finance in the province where the estate will be located.   Accordingly, based on this assumption there will be no estate taxes payable by either the deceased or the non-resident beneficiaries.

     Generally speaking, where a deceased taxpayer owns capital assets at the time of this death, he is deemed to dispose of each asset owned by him (other than depreciable property) for proceeds of disposition equal to fair market value.  Accordingly, the deceased is taxed on any capital gains that arose prior to the date of death.  However, where the property qualifies as a principal residence for the full period of ownership by the deceased he will be exempt from capital gains tax on that property.  The deceased may also qualify for the capital gains deduction described in pages 16-20 of the "Capital Gains Tax Guide" (enclosed) where the house did not qualify as a principal residence for the full period of ownership.

     Where a person has acquired capital property (other then depreciable property) as a consequence of a death he is deemed to acquire the asset immediately before the death at a cost equal to fair market value.  Part III of the enclosed booklet "1988 Deceased Persons' Income Tax Guide"  outlines similar treatment in the case of depreciable property.

     In summary, the beneficiaries of the estate are deemed to acquired the inherited capital assets (other than depreciable property) at fair market value and no capital gains arise in the hands of the beneficiaries at the date of death.  However, on a subsequent disposition by the beneficiary any proceeds of disposition in excess of the beneficiary's cost will be treated as a capital gain for Canadian income tax purposes.

B.     The Income Tax Act provides that where a taxpayer has disposed of an asset to any person by way of gift, he is deemed to have received proceeds equal to the fair market value at the date the gift was made and is required to report any capital gain which arises at the time. Again, because of the exemption that relates to principal residences and the capital gains deduction referred to above, the individual making the gift may or may not have any capital gains on which to pay tax.  The person receiving the gift will have a deemed cost equal to the fair market value and will be subject to tax on capital gains arising on the subsequent disposition of that asset based on the excess of the proceeds of disposition over the deemed cost.

C.     In both cases discussed above, the Canadian resident is deemed to dispose of this property at fair market value either immediately before his death or at the time he makes a gift.  Any capital gains that arise as a result of these events is required to be reported in the year of death or in the year the gift is made.

D.     As indicated above, it is our understanding that there are no estate taxes in Canada but capital gains tax may result where a resident of Canada dies in the year or a non-resident of Canada who owns taxable Canadian property dies in the year.  Where a non-resident who owns taxable Canadian property described on page 33 of the Capital Gains Tax Guide dies, he will be deemed to dispose of such property immediately before his death and to receive proceeds of disposition equal to fair market value at that time.  Any resultant taxable capital gains are included in income in the deceased's last return.

     Our replies would be the same whether or not the non-resident was a citizen of Canada.

     We trust these comments are adequate for your purposes and we are enclosing copies of IT-209R which explains the treatment of a gift.

Yours truly,

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