11 February 1993 Income Tax Severed Letter 9226015 - Reunification of Germany—ACB of Inheritance from E. Germany

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

922601
XXXXXXXXXX D. Patrick
(613) 957-2125

Attention: XXXXXXXXXX

February 11, 1993

This is in reply to your letter of August 24, 1992, in which you requested a technical interpretation with respect to the return of property by the German Government to a Canadian taxpayer on the reunification of Germany.

XXXXXXXXXX

In 1990, the Government of Germany, as part of the reunification of West Germany and East Germany, returned the control of all property seized by the communist government of East Germany to the previous owners or their heirs. Accordingly, the taxpayer gained control of the property in 1990. Throughout the period prior to the seizure of the property by the Communist East German Government until its return to the Canadian taxpayer, the legal title to the property was in the name of the taxpayer's grandmother or in the name of the taxpayer .

It is you position that even though the legal title to the property was acquired by the taxpayer in XXXXXXXXXX it was under "Zwangsverwaltung" (control of the state) and the taxpayer had none of the rights associated with the ownership of the property until control of the property was returned in 1990.

You argue that even if the taxpayer had been a resident of East Germany during the period from XXXXXXXXXX to 1990, she would not have had control of the property as there was no concept of private property under the Communist East German law. You advise that it would therefore be inappropriate to consider the property to have been acquired for Canadian income tax purposes in XXXXXXXXXX at the time of the inheritance. In your opinion it would seem more appropriate that the taxpayer be considered to have acquired the property at the time that all the rights, risks and rewards of ownership had vested in the taxpayer, being in this case, in 1990.

You have advised that the taxpayer, on obtaining possession of the property, returned to reside in Germany. If the property was considered to have been acquired for tax purposes in XXXXXXXXXX, the taxpayer would be subject to tax on the increase in value from December 31, 1971 to the date that the taxpayer's residency in Canada ceased. This increase in value could be substantial as the fair market value of the taxpayer's interest in the property in 1971 would likely be negligible as there were none of the rights usually associated with ownership. If the taxpayer was considered to have acquired the property in 1990, the fair market value of the property would likely be approximately equal to the fair market value on the date residency ceased (approximately the same date) and the taxpayer would not realize a gain on the deemed disposition of the property on becoming a non-resident of Canada.

Our Comments

The point in time when ownership is acquired is a question of fact which can only be determined after reviewing all the relevant documents and circumstances, however we wish to offer the following comments on the issue posed. It appears the taxpayer received legal title to the property in XXXXXXXXXX albeit, there was never certainty the taxpayer would receive the beneficial title to the property in question. It is our opinion that a taxpayer will not have acquired the property for tax purposes until the point in time when they have acquired both the legal and the beneficial ownership of the property. Consequently, it is our opinion that the adjusted cost base of the property would be the fair market value of the property on the date the taxpayer acquired both the legal and beneficial ownership of the property. Any gains or income attributable to the period prior to such date would not be taxable in Canada since such amounts would be considered to meet the criteria of being considered a windfall.

Yours truly,

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