27 September 1995 External T.I. 9513785 - COMPUTATION OF ADJUSTED COST BASE

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.

Principal Issues:

Computation of ACB in two hypothetical situations.

Position TAKEN:

In situation 1, the beneficiary is non-resident and the property disposed of is located in Canada. We are of the opinion that subparagraph 53(2)(h)(i.1) of the Act will reduce the ACB of the beneficiary's capital interest by $25 corresponding to the amount not subject to Part XIII tax. In situation 2, the beneficiary is non-resident and the property disposed of is in the United States. Part XIII is not applicable because of article XXII(2) of the Canada-U.S. convention. However, the ACB of the beneficiary's capital interest will be reduced by $100 corresponding to the difference between the amount that has become payable to the beneficiary ($100) and the amount from which an amount of tax was deducted under Part XIII by reason of paragraph 212(1)(c) of the Act ($0).

Reasons FOR POSITION TAKEN:

Based on the interpretation of the Act.

5-951378
XXXXXXXXXX (613) 957-8953

Attention: XXXXXXXXXX

September 27, 1995

Dear Sirs:

Subject: Computation of Adjusted Cost Base ("ACB")

This is in reply to your letter dated May 15, 1995, requesting an interpretation with respect to the application of subparagraph 53(2)(h)(i.1) of the Income Tax Act (the "Act") in two hypothetical situations. We apologize for the delay in our response.

The particular circumstances outlined in your letter appear to be related to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation service office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

With respect to situation 1 described in your letter, it is our understanding that the taxable capital gain will be deducted by the trust under paragraph 104(6)(b) of the Act. However, the non-resident beneficiary will be subject to Part XIII tax on the income received from the trust by reason of paragraph 212(1)(c) of the Act, regardless of the source from which the trust derived it.

We agree with your interpretation that clause 53(2)(h)(i.1)(A) of the Act will reduce the ACB of the beneficiary's capital interest in the trust by an amount of $25 corresponding to the amount not subject to Part XIII tax.

In situation 2, the Department agrees with your conclusion that Article XXII(2) of the Canada-U.S. Income Tax Convention (1980) applies to this situation to provide that the income distributed by the trust to the U.S. beneficiary is exempt from Canadian withholding tax.

However, it is our opinion that clause 53(2)(h)(i.1)(A) of the Act should reduce the ACB of the capital interest held by the non-resident beneficiary by an amount of $100 corresponding to the difference between the amount that has become payable to the beneficiary ($100) and the amount from which an amount of tax was deducted under Part XIII by reason of paragraph 212(1)(c) of the Act ($0). In addition, we confirm that no amount can be designated by the trust under subsection 104(21) of the Act as the beneficiary of the trust is a non-resident.

This opinion assumes that, for purposes of Part XII.2 tax, the taxable capital gain of the trust would not be from the disposition of taxable Canadian property.

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

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch