20 February 1990 Internal T.I. 90M02469 F - Tax Treatment in Canada on Death of U.S. Resident

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.

February 20, 1990

Dear 19(1)

We are writing in reply to your letter dated  November 13, 1989, concerning the tax treatment in Canada of certain sources of income upon death of a U.S. resident. The following comments may be of some assistance.

1)     There are not estate taxes in Canada.

2)     The Income Tax Act of Canada deems all taxpayers to have disposed, immediately before their death, of all capital property owned at that time. In the case of non-depreciable capital property (i.e. land and personal-use buildings), the proceeds of disposition are deemed to be the fair market value at that time. In the case of depreciable property (i.e. rental buildings on which the non-resident filed a tax return in Canada in respect to its rental income) the proceeds of disposition and recapture of depreciation (if applicable) are subject to special computations. Where the property is taxable Canadian property, as is the case with real property owned by a non-resident, the non-resident is subject to Canadian tax on the taxable capital gain from the disposition.  Effective 1990, the taxable capital gain is 75% of the gain.  Where the property was owned prior to 1972, the taxable capital gain may be reduced as capital gains were not taxable prior to 1972.

3)     The Canada - United States Income Tax Convention (1942) provided that most gains are taxable in the state of residence only. The Canada -U.S. Income Tax Convention (1980) provides that gains on the alienation of real property situated in the other contracting state may be taxed in that state.  Accordingly, Article XIII, paragraph 9 of the new Convention provides a transitional rule that in effect reduces the gain which is liable for tax in Canada by the portion of the gain attributable from date of acquisition to December 31, 1984.  The property must have been acquired prior to September 27, 1980, to be eligible for this reduction.

4)     The principal balance of bank accounts and certificates of deposit are not subject to Canadian tax upon distribution to non-residents (whether individual, corporation, estate or trust).

5)     Interest paid or credited to the non-resident (or the estate or trust) is subject to 15% withholding tax pursuant to Article XI of the new Convention.

We trust you will find this to your satisfaction. If you require more information, please do not hesitate to contact us. We apologize for the delay in replying.

Yours sincerely,

C. SavageA/DirectorProvincial and International Relations Division

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