14 August 1990 Ministerial Correspondence 59684 F - Canada-Germany Income Tax Agreement Re Gain on Disposition of Shares

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.

Dear Sir:

Re:  Article 13 of the Canada-Germany Income Tax Agreement (1981) (the "Agreement")

This is in reply to your letters dated February 22, 1990 and July 21, 1990, respectively, wherein you requested our interpretation with regards to the application of Article 13 of the Agreement to the following hypothetical situations.  We apologize for the delay in responding to your request.

Facts

1.         Canco is a "Canadian corporation" within the meaning of paragraph 89(1)(a) of the Income Tax Act (Canada) (the "Act").

2.         Canco owns immovable properties located in Canada which have an original cost of $1,000,000 and an estimated current fair market value of $1,500,000.

3.         There are no other significant assets owned by Canco.

Situation A

An individual who resides in West-Germany owns all of the outstanding shares of Canco.  Upon the death of this particular individual, there may be a deemed disposition of his shares of Canco.  It is your opinion that the gain on the deemed disposition of the Canco shares satisfy all of the conditions set forth in paragraph 4(a) of Article 13 of the Agreement thereby subjecting the gain to tax under the provisions of the Act.  In the context of this situation the conditions set forth in paragraph 4(a) of Article 13 of the Agreement are as follows:

i)         the shares form part of a substantial interest in the capital stock of Canco (where substantial interest is defined as greater than 10%)

ii)     Canco is resident in Canada

iii)     the value of the shares of Canco is derived principally from immovable property situated in Canada.

Situation B

A West-German "Gesellschaft buergerlichen Rechts", i.e. a private corporation (NRCo) owns all of the shares of Canco and NRCo is owned by two individuals who reside in West Germany.  The assets of NRCo consist primarily of the shares of Canco.  If one of the individuals should die and will his interest in NRCo to his children there may be a deemed disposition of his interest in NRCo.  It is your opinion that the gain on the deemed disposition of the shares of NRCo would meet the conditions set forth in paragraph 4(b) of Article 13 of the Agreement.   The conditions are as follows:

i)     the gain must arise from the alienation of an interest in a partnership, trust or estate

ii)     the value of such interest must be derived principally from immovable property situated in Canada.

Your conclusion is based upon the assumption that the shares form part of an interest in an estate and the value of the shares is derived principally from real estate situated in Canada, therefore, satisfying the above noted conditions.

Situation C

NRCo owns all of the shares' of Canco and NRCo is owned by two individuals who reside in West Germany.  The Canco shares represent approximately one third of the fair market value of NRCo and West-German investments form the other two thirds of the fair market value of NRCo.  You feel that in the event of the death of one of the individuals or on the sale of the shares of NRCo by one of the individuals, the gain on the disposition of the shares would be subject to paragraph 5 of Article l3 of the Agreement exempting the gain from being taxed under the provisions of the Act.  Your opinion is based upon the fact that the value of the shares would not be derived principally from the immovable property situated in Canada, therefore, not satisfying the conditions present within paragraph 4(a) and 4(b) of Article 13 of the Agreement.

Situation D

This situation is the same as situation B except that the Canco shares are owned by a West-German "Kommanditgesellschaft", i.e. a limited partnership, (NRP) rather than NRCo.  You are of the opinion that the situation satisfies the conditions set forth in paragraph 4(b) of Article 13 of the Agreement, therefore, subjecting the gain on the deemed disposition of the interest in the partnership to the application of the provisions of the Act. Your conclusion is based upon the fact, that there is a disposal of an interest in a partnership the value of which is derived principally from immovable property situated in Canada.

Situation E

This situation is the same as situation C except that the Canco shares and the West-German investments are owned by NRP rather than NRCo.  You are of the opinion that the gain on the disposition of the interest in the partnership would be subject to paragraph 5 of Article 13 of the Agreement, thereby, exempting the gain from being taxed under the provisions of the Act.  Your conclusion is based upon the fact that the value of the partnership interest is not derived principally from immovable property situated in Canada, therefore, not satisfying one of the conditions set forth in paragraph 4(b) of Article 13 of the Act.

You have requested our comments regarding your opinions reached in each of the above situations.

We agree with your opinions regarding situations A, C, D and E. However, we are of the opinion that the gain on the disposition of the shares of HRCo in situation B would be exempt from tax in Canada under paragraph 5 of Article 13 of the Agreement.  The shares would not constitute an interest in a partnership, trust or estate therefore not satisfying one of the conditions set forth in paragraph 4(b) of Article 13 of the Agreement.  Since NRCo is not resident in Canada the conditions set forth in paragraph 4(a) of Article 13 of the Agreement would not be satisfied.  The gain on the disposition would not fall within paragraphs 4(a) and 4(b) of Article l3 of the Agreement with the result that paragraph 5 of Article 13 of the Agreement would apply.  If, however, NRCo were to realize a gain on the disposition of its shares in Canco it is our view that such gain would be a gain described in paragraph 4(a) of Article 13 of the Agreement.

We would also draw your attention to Situation C where you have reached your conclusion on the basis that the value of the shares is not based principally upon immovable property situated in Canada.  Since NRCo is not a resident of Canada, the gain would not be one described in paragraph 4(a) of Article 13 of the Agreement.

The foregoing comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may lead to different conclusions.  The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch