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.
International Tax ProgramsRulings Directorate Directorate
Attention: G. Todd Assessment & Enquiries Programs
Section 114 of the Act & Foreign Business Income
This is in reply to your memorandum of April 16, 1993 concerning an individual who carried on a business in the U.S. before and after the time he emigrated from Canada to the U.S.
Our understanding of the facts is as follows:
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The main question with which you were concerned is whether any U.S. business income for the period March 1, 1992 to February 28,1993 is required to be included in income in 1992 or 1993 under section 114 or 115 of the Act.
Our Comments:
7. It is a question of fact:
(a) whether the individual ceased to be a resident of Canada on a particular date; and
(b) whether the foreign business was separate and distinct from the Canadian business.
8. The deemed disposition rules under section 48 of the Act generally apply to each capital property owned by the individual, other than the properties described in paragraphs 48(1)(a) to (c) of the Act. This would include each capital property used or held in the individual's U.S. proprietorship. Therefore, the individual would be required to include in his income for 1992 any taxable capital gains in respect of the deemed disposition of every capital property held or used in his U.S. business if he does not make an election under paragraph 48(1)(c) of the Act.
9. No portion of the U.S. business income for the period March 1, 1992 to the date of emigration on September 30, 1992 would be required to be included in the individual's income under section 114 of the Act for 1992. Furthermore, the U.S. business income for the first fiscal period ended February 28, 1993 (i.e. for the period March 1, 1992 to February 28,1993) would not be required to be included in the individual's income under section 115 of the Act for 1993 since that section is only applicable to a business carried on in Canada.
Where section 114 of the Act applies to part year residents, it has been the Department's position for the 1992 and prior years that, where a fiscal period of such an individual's foreign business ends during a period referred to in paragraph 114(a) of the Act, he was required to include in his income under that paragraph the entire amount of the foreign business income for such fiscal period. On the other hand, where a fiscal period of the individual's foreign business does not end during a period referred to in paragraph 114(a) of the Act, no portion of the foreign business income for such fiscal period was required to be included in the individual's income under section 114 of the Act.
10. Since the individual ceased to carry on the Canadian business on September 30, 1992, the Canadian business income for the period January 1, 1992 to September 30, 1992 is required to be determined and included in the individual's income for 1992 under paragraph 114(a) of the Act. Furthermore, the individual is precluded by subsection 25(2) of the Act from making the election described in subsection 25(1) of the Act.
11. The proposed legislation for new section 128.1 of the Act is effective after 1992 and it sets out the new deemed disposition rules for all properties owned by individuals at the time they cease to be, or become, resident in Canada. This new section 128.1 will replace section 48 of the Act after 1992. The opening words of paragraphs 128.1(1)(b) and 128.1(4)(b) make it clear that the deemed disposition rules on immigration and emigration, respectively, apply to each property owned by a taxpayer, other than the exceptions mentioned in subparagraphs 128.1(1)(b)(i) to (v) and 128.1(4)(b)(i) to (vi) of the Act.
Where an individual is a proprietor of a foreign business, it is our view that all properties of the business, including the business itself, real property, depreciable property, inventory, eligible capital property (e.g. goodwill), etc., would be deemed to have been disposed of upon immigration or emigration, as the case may be, since such properties do not fall under the exceptions in the above-mentioned subparagraphs.
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If you have any further questions in this matter, please do not hesitate to contact the writer.
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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