27 February 1990 Ministerial Correspondence 74494 F - Canada-U.S. Income Tax Convention on Exempt Income and Alternative Minimum 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.

Subject: Treaty Exempt Income and Alternative Minimum Tax

This is in reply to your memorandum of November 7, 1989 in which you asked for our views on the application of the minimum tax rules of the Income Tax Act (the "Act") to a treaty exempt capital gain.

The situation

1.     A United States ("U.S.") resident disposed of a property located in Canada during 1988.

2.     The capital gain resulting from the disposition is exempt from tax in Canada pursuant to Article XIII of the Canada-U.S.  Income Tax Convention (1980) (the "Convention").

3.     The U.S. resident filed a 1988 Canadian Income Tax Return wherein he reported the taxable portion of the capital gain and an equal offsetting deduction under subparagraph 110(1)(f)(i) of the Act.

4.     The "non-taxable" portion of the capital gain was subjected to minimum tax.

Your question

Does Article XIII of the Convention exempt the total capital gain from taxation in Canada?

Our views

The definition of taxes covered in subparagraph 2(a) of Article II of the Convention indicates that in the case of Canada the existing taxes to which the Convention shall apply include those levied under Part I of the Act.  As minimum tax is levied under Part I of the Act it is covered by the Convention.

The term "gains" used in Article XIII of the Convention refers to the entire capital gain and not just the taxable portion of the gain as defined for Canadian tax purposes.

We recognize that pursuant to the provisions of subsection 127.52(1) of the Act the "non-taxable" portion of the capital gain is included in the individual's adjusted taxable income for the year for the purposes of minimum tax.  However, the provisions of Canada's tax treaties override the Act and in this case the provisions of Article XIII of the Convention would exempt the total capital gain from Part I taxation, including minimum tax, in Canada.

We trust this will be of assistance to you.

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch