7 November 1994 External T.I. 9400965 - U.S. REAL PROPERTY INTEREST & FTC (5638-2)

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.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

940096
XXXXXXXXXXG. Middleton

Attention: XXXXXXXXXX

November 7, 1994

Dear Sirs:

Re: Foreign Tax Credit

This is in reply to your letter of January 13, 1994 and further to our telephone conversations wherein you requested our views regarding a claim for a foreign tax credit under subsection 126(1) of the Income Tax Act (the "Act") in the following situation.

1.Mr. A, a Canadian resident and citizen, owns more than 5% of the outstanding shares of a Canadian public company ("Canco") and he holds the shares as capital property.

2.Canco is a mining company and more than fifty percent of the fair market value of Canco is derived from real properties situated in the U.S. which are mining properties and mining claims.

3.A U.S. public company ("USCO") would like to acquire Canco's U.S. mining properties and claims.

4.A direct acquisition of Canco's properties by USCO would result in significant Canadian and U.S. taxes. However, an arrangement was drawn up whereby USCO acquired Canco's properties through a series of complex transactions and steps involving: USCO incorporating two wholly owned Canadian subsidiaries; an amalgamation between Canco and one of USCO's subsidiaries to form "Amalco"; a wind-up of Amalco into USCO's other Canadian subsidiary; and then finally a wind-up of the latter Canadian subsidiary into its parent company, USCO.

5.A critical and fundamental condition under the arrangement was for Canco, with the consent of Mr. A, to make an election under section 897(i) of the Internal Revenue Code (the "Code") to treat Canco as a U.S. domestic corporation.

6.By making the election described in 5 above, the shares of Canco became "United States real property interests" as defined in section 897(c)(I)(A)(ii) of the Code. As a result of this, Mr. A would be subject to U.S. tax on the gains arising on the disposition of his Canco shares under the arrangement since he owned more than 5% of Canco's shares immediately before the start of the arrangement and at the time Canco was a U.S. domestic corporation. It is our understanding that Mr. A is the only shareholder of Canco who would be liable for such U.S. tax.

7.Mr. A would also be subject to Canadian federal and provincial taxes in respect of the capital gains on the disposition of his Canco shares under the arrangement.

Your question is whether Mr. A, in the above circumstances, would be entitled to claim a foreign tax credit under subsection 126(1) of the Act in respect of the U.S. taxes he paid and is liable for as a result of the disposition described in 6 above.

By virtue of paragraphs 1 and 3 of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention"), the U.S. has the right to tax Mr. A's gains on the disposition of his Canco's shares, as described in 6 above. Furthermore, paragraph 3(a) of Article XXIV of the Convention provides that gains of a resident of Canada which may be taxed in the U.S. in accordance with the Convention shall be deemed to arise in the United States for the purposes of Article XXIV and 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. As a result of these provisions in the Convention, it is our view that Mr. A would qualify to claim a foreign tax credit under subsection 126(1) of the Act in respect of the U.S. tax liability and payment referred to in 6 above.

The above comments represent our general views with respect to the situation describe above and they do not constitute an advance income tax ruling. Therefore, as described in paragraph 21 of Information Circular 70-6R2, these comments are not binding on the Department.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch