20 October 1992 Income Tax Severed Letter 9221162 - Article 27(2) of the Canada-U.K. Treaty

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.

922116
Jim Wilson
24(1) (613)957-2123

Attention: 19(1)

October 20, 1992

Dear Sirs:

Re: Article 27(2) of the Canada-United Kingdom Income Tax Convention (the "treaty")

We are writing in reply to your letter dated July 6, 1992, in which you requested our comments concerning paragraph 2 of Article 27 of the treaty.

Our understanding of the facts is as follows:

• 1. Mrs. A, a non-resident of Canada, lives in England and owns capital assets which are situated in England as well as Canada.
• 2. Mrs. A owns a residential property in both England and Canada and is a shareholder in a private corporation resident in Canada that holds a portfolio of securities

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(i. e. the value of these shares is not derived directly or indirectly from immovable property situated in Canada).
• 3. In England, Mrs. A is considered to be resident but not domiciled there for tax purposes. Thus, Mrs. A pays tax in England only on her income derived from the UK or remitted to her there from another country. Mrs. A is a resident of the UK in accordance with Article 4 of the treaty.
• 4. For purposes of estate duty on death, Mrs. A is deemed to be domiciled in England because she has been resident there for 17 out of the last 20 years, and if she dies there her worldwide assets will be subject to English estate duty.
• 5. In England, there is no income tax payable on death; there is an estate duty instead. Capital property is not deemed to be disposed of on death; the deceased's adjusted cost base of her assets is simply uplifted to fair market value at that time.

You have stated that upon death, Mrs. A would be subject to Canadian tax resulting from the deemed disposition of her real property situated in Canada. Your concern is with the deemed disposition of shares of the Canadian private corporation. More specifically, you wish to know whether paragraph 2 of Article 27 will apply to deny Mrs. A the exemption from Canadian tax as otherwise provided in accordance with paragraph 8 of Article 13 of the treaty.

Our Comments

As you are aware, Canada does not impose a conventional estate, succession or inheritance tax. Instead, the Income Tax Act (the "Act") provides that a person, whether resident in Canada or not, who dies is deemed to dispose of most types of property for proceeds equal to fair market value. Specifically, a non-resident of Canada who at the time of death owned shares that were capital property, would be deemed to have disposed of the shares immediately before death and to have received proceeds of disposition for the shares equal to the fair market value of those shares at that time (i.e. subsections 70(5) and (5.3) of the Act). Where the shares are taxable Canadian property, any taxable capital gain resulting from such deemed disposition will be subject to Part I tax, subject to any relief provided under

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the treaty. The spousal/spousal trust rollover provisions in subsection 70(6) of the Act do not apply to non- residents.

Any taxable capital gain resulting from the disposition of shares of a private corporation resident in Canada by a non- resident would be included in the computation of taxable income earned in Canada pursuant to paragraph 115(1)(b)(iii) of the Act. However, pursuant to paragraph 8 of Article 13 of the treaty, subject to paragraphs 5(a) and 9 of Article 13, such a capital gain is only taxable in the UK, thus an offsetting deduction under paragraph 110(1)(f) of the Act would be allowed in computing taxable income earned in Canada. In this regard, even though paragraph 2 of Article 27 of the treaty can apply to capital gains, the deemed disposition pursuant to subsection 70(5) of the Act does not result in a gain (income) that is subject to tax in the UK by reference to the amount thereof which is remitted to or received in the UK. Accordingly, that provision does not apply.

In the event the UK estate tax applies, such tax does not qualify as an income or profits tax for purposes of calculating a foreign tax credit in Canada. Therefore, a person who is liable for UK estate tax would not be entitled to reduce his or her Canadian tax by any UK estate tax payable to the UK.

We trust you will find this to your satisfaction.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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