8 December 1992 Income Tax Severed Letter 9225245 - Dispositon of Cottage by Non-resident (Capital Gain)

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.

922524
      19(1)                                         K. B. Harding
                                                    957-2111

December 8, 1992 Dear Sirs:

Re: Capital Gains on the Disposition of a Cottage

This is in reply to your letter of August 18, 1992 wherein you requested our opinion concerning certain issues where a U.S. resident disposes of real estate (cottage and related property) located in Canada and any information we might have concerning the taxation of a Canadian citizen residing in the United States who dies while owning property in Canada.

The determination of whether a particular property is eligible to be designated as a principal residence is a question of fact. Paragraphs 3 to 12 of the attached Interpretation Bulletin IT-120R3 provides the guidelines issued by Revenue Canada (Taxation) concerning the qualifications required to qualify as a principal residence in Canada.

Generally, where a taxpayer disposes of (i.e. sells) or is deemed to dispose of capital property (i.e. death) his capital gain is equal to the excess of the proceeds of disposition (i.e. selling price) over the adjusted cost base (i.e cost of property) and any outlays or expenses to the extent they were incurred for purpose of making the disposition. The taxpayer is required to include 3/4 of the capital gain (taxable capital gain) in income in the year of disposition.

As indicated in Chapter 3 of the attached "Guide for Preparing T1 Returns for Deceased Persons", a deceased person is deemed to have disposed of all capital property owned by him immediately before his death. Therefore a capital gain or loss will arise on the death of an individual where he holds such property. However, a U.S. resident would only be liable to tax in Canada where such property qualifies as taxable Canadian Property (TCP). We are enclosing a copy of Interpretation Bulletin IT-420R3 , paragraphs 16 and 17 outline the definition of TCP and confirms the treatment on death. The cottage and related land owned by your father would constitute TCP as explained in paragraph 16(a) of the Bulletin. As indicated in paragraph 16, shares of a private corporation resident in Canada would also qualify as a TCP. However, shares of a public corporation would generally only qualify as TCP where the taxpayer owned 25% or more of the issued shares of any class of capital of the corporation at any time during such a period of 5 years prior to the disposition.

Pages 5 and 6 of the "Capital Gains Tax Guide" outline the rules for calculating a capital gain or loss and the definition of such terms as used therein is set out in Chapter 2 of such Guide. In addition, page 6 indicates that where the property was owned prior to 1972, there are special rules for the calculation of the capital gain. We are enclosing a copy of Interpretation Bulletin IT-84 which discusses this calculation of the "adjusted cost base" is such situations.

Any questions you might have concerning the taxation of Canadian real estate by the United States should be directed to the Internal Revenue Service. However, where both Canada and United States tax the same property, the Canada-U.S. Income Tax Convention provides that the Contracting State where the taxpayer is resident will provide a foreign tax credit in order to avoid double taxation.

We trust the above comments will be of assistance to you/

Yours truly,

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