1 May 1989 Income Tax Severed Letter 7-3797 - [U.S. Estate Tax]

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.

MAY - 1 1989 Specialty Rulings Directorate K.B. Harding 957-2129

SUBJECT: U.S. Estate Tax

This is in response to your telephone conversation with the undersigned wherein you requested our opinion whether we would permit a deduction for U.S. Estate tax in the calculation of a capital gain pursuant to subsection 40(1) of the Income Tax Act (the "Act").

A review of our files indicate that we have not taken a position on this matter in Rulings Division.

Description of Estate Tax

The U.S. Estate Tax is imposed on every decedent "non-resident not a citizen of the United States" by virtue of section 2101 of the Internal Revenue Code. The tax is basically imposed on the value of the taxable estate which includes the value of the gross estate minus a proportionate share of the deductions covering certain expenses, losses, indebtedness and taxes which relate to the U.S. situs property.

The value of the gross estate of the non-resident not a citizen of the United States includes the value at the time of death of:

(1) stock of a U.S. company (2) debt of a U.S. person or level of government (3) real property located in the U.S. (4) tangible personnel property located in the U.S. (5) intangible property if rights enforceable against a U.S. citizen, resident, U.S. company or government unit.

The rates of tax vary from 18% on the first $10,000 (U.S.) and escalates to 50% where the taxable estate exceeds $2,500,000 (U.S.).

The estate is granted a credit against tax of $13,000 (U.S.) which is equivalent to an exemption of up to $60,000 (U.S.) to the value of the estate.

Income Tax Act and the Canada-U.S. Income Tax Convention

In our opinion, the U.S. Estate Tax is neither an income or profits tax for purposes of section 126 of the Act nor a tax imposed on capital for purposes of Articles XXIII and XXIV of the Canada-U.S. Income Tax Convention (the "Convention").

It is our view that the U.S. Estate Tax will not qualify as a non-business-income tax, as defined in paragraph 126(7)(c) of the Act, since such taxes are imposed on the value of the deceased assets rather than a tax on the income or profits earned by the deceased prior to his death. Accordingly, such taxes would also not qualify for a deduction pursuant to subsection 20(12) of the Act.

The Technical Explanation to the Convention clearly indicates that the "... taxes not generally covered by the Convention include, in the case of United States, the estate ... taxes ...". (underlining for emphasis) In addition, the Technical Explanation to the Convention states "(N)either Canada nor the United States presently impose taxes on capital". Accordingly, the Convention will not provide any relief to the deceased estate with respect to U.S. Estate Tax. The OECD commentary on Article 22 concerning the Taxation of Capital states that "This Article deals only with taxes on capital, to the exclusion of taxes on estates and inheritances and on gifts and of transfer duties".

Subparagraph 40(l)(a)(i) of the Act permits a taxpayer to deduct any outlays or expenses to the extent they were made or incurred by him for the purpose of disposing of a capital asset.

It is our view that the U.S. Estate Tax will not be deductible in calculating the capital gain of a deceased taxpayer since such taxes were not made or incurred for the purpose of making the disposition. The Estate Tax is merely a tax imposed on the value of the assets held by deceased at the time of his death and would be incurred whether or not the assets were disposed of either immediately or in the distant future.

In summary, we are of the view that the U.S. Estate Tax will not be deductible in Canada under subsections 20(12), 40(1) or 126(1) of the Act and there is nothing in the Convention to provide any relief to the taxpayer.

for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch