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.
921629
XXXXXXXXXX
Olli Laurikainen
(613)957-2116
Attention: XXXXXXXXXX
January 20, 1993
Dear Sirs:
Re: Subsection 126(1) of the Income Tax Act (the "Act")
- This is in reply to your letter of May 11, 1992 wherein you requested a technical interpretation regarding subsection 126(1) of the Act and the Canada - U.S. Income Tax Convention (1980) (the "Treaty") in the following hypothetical situation:
- 1. Mr. A, an individual resident in Canada, incorporated a taxable Canadian corporation ("Canco") as defined in paragraph 89(1)(i) of the Act.
- 2. Shortly after the incorporation of Canco, Mr. A transferred to Canco on a tax deferred basis, pursuant to subsection 85(1) of the Act, non-depreciable capital property comprising of U.S. situs real property (the "Property"), in exchange for 100 common shares of Canco. At the time of the transfer, the property had a fair market value of $100 and an adjusted cost base of $1.00. No other shares were issued nor did Canco own any other assets.
- 3. In order to defer any U.S. taxes arising as a result of the disposition, Mr. A elected pursuant to section 897(i) of the Internal Revenue Code to treat Canco as a domestic (U.S.) corporation.
- 4. In 1992, Mr, A sold his 100 common shares of Canco to a U.S. resident for $1,000.
- 5. As a result of the disposition of the 100 common shares, Mr. A paid U.S. tax in the amount of $333.
- You question whether in the above circumstances, Mr. A would qualify for a foreign tax credit under subsection 126(1) of the Act .
- It is our understanding that in the above circumstances the gain on the sale of the shares may be taxed in the United States in accordance with the Treaty since such shares would fall within the meaning of the term "U.S. real property interest" for the purposes of paragraph 3(a) of Article XIII thereof.
- Paragraph 3(a) of Article XXIV of the Treaty provides that gains of a resident of Canada that may be taxed in the U.S. in accordance with the Treaty shall be deemed to arise in the United States for the purposes of that Article. Paragraph 2(a) of Article XXIV provides that subject to the provisions of the Act, Canada must permit a foreign tax credit in respect of income tax paid to the United States on gains arising in the United States. Therefore, it is our view that by virtue of the Treaty, Mr. A would qualify to claim a foreign tax credit pursuant to subsection 126(1) of the Act in respect of the U.S. taxes referred to in paragraph 5 above.
We trust the above will be of assistance to you.
Yours truly,
- for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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