17 September 1987 Income Tax Severed Letter 7-1972 - [Rights and things transferred to non-residents]

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.

DATE: September 17, 1987

TO: Head Office T2 - T3 Assessing and Taxroll Programs Division

ATTENTION: J.M. Campbell Trust and Other Returns Section

FROM: Small Business and General Division C. Thornley 957-2101 RE: Rights and things transferred to non-residents

This is in reply to your memorandum of July 21, 1987, with attached letter from XXXX dated July 8, 1987, concerning the application of subsection 70(3) of the Income Tax Act (the "Act") to non-resident beneficiaries.

In the hypothetical fact situation presented in the accountant's letter Mr. " X ", a Canadian resident, died leaving cattle to his non-resident beneficiaries. The cattle were subsequently transferred to them pursuant to subsection 70(3) of the Act.

You ask us to comment on two possible situations:

1) the non-resident beneficiaries will return to the U.S. with the cattle transferred to them; and

2) the non-resident beneficiaries will sell the cattle in Canada under their own name.

As indicated by you there is nothing in the Act that precludes a transfer of inventory in the above circumstances to non-resident beneficiaries.

The issue to be resolved is whether there are provisions in the Act to tax the income arising from the subsequent disposition of the cattle in the hands of the non-resident beneficiaries in either or both of the above two examples.

Our comments

1) In our opinion because the beneficiaries are non-residents and because the cattle are inventory rather than capital properties section 48 would not apply in the first example to deem a disposition of property and for similar reasons section 116 would not apply either. There are no provision to tax the income that may arise from a subsequent disposition of the cattle in the U.S. unless it can be shown that the beneficiaries carried on a farm business in Canada and the income from the sale was attributable to a permanent establishment in Canada at any time in the year or a previous year.

Similarly, in respect to example two, unless it can be shown that the beneficiaries are carrying on a business in Canada and the income from the sale is attributable to a permanent establishment in Canada or that the proceeds of sale are Part XIII income, there does not appear to be any provision to tax the gain on the subsequent sale of the cattle transferred to them.

We have discussed this matter briefly with Current Amendments personnel and we will be sending them copies of this correspondence for their consideration.

Wm. R. McCoIm

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch