9 July 1997 External T.I. 9627095 - ARTICLE 13 (UK) AND ARTICLE XIV (BARBADOS)

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:

Whether release of the security posted under subparagraph 128.1 (4)(b)(iv) of the Act should be granted once the time period stipulated in a tax treaty has been completed.

Position: No

Reasons:

The time period is not that after the taxpayer has become a non-resident of Canada but from the time the property at issue is alienated. Many things may happen between the time of the departure from Canada and the time the property at issue is alienated such as the taxpayer may become at any time a resident of Canada or become a non-resident of that treaty country.

	                               	962709
XXXXXXXXXX	                                    S. Leung

Attention: XXXXXXXXXX

July 9, 1997

Dear Sirs:

Re: Subparagraph 128.1(4)(b)(iv) of the Income Tax Act
Article 13 of the Canada-United Kingdom Income Tax Convention
Article XIV of the Canada-Barbados Income Tax Convention

We are writing in response to your letter of July 30, 1996 in which you requested clarification of the Department's position on the interaction of subparagraph 128.1(4)(b)(iv) of the Income Tax Act (the "Act") and paragraph 9 of Article 13 of the Canada-United Kingdom Income Tax Convention (the "U.K. Convention") or paragraph 5 of Article XIV of the Canada-Barbados Income Tax Convention (the "Barbados Convention"). Specifically you enquired about the possibility of the Department granting a release of the security posted under subparagraph 128.1(4)(b)(iv) of the Act in respect of an election to treat certain shares of a public corporation as taxable Canadian property.

Your Requests

You enquired about the following:

.Once the five year period stipulated in the above-noted provisions of the U.K. Convention or the Barbados Convention has been completed, whether a request from a U.K. or Barbados resident for the release of the security posted by him or her would be granted by the Department.

.If such a request is granted, whether the release of the security would result in a rescission of the election made under paragraph 128.1(4)(b)(iv) of the Act or whether the shares of the public corporation which are the subject of the election would continue to be treated as taxable Canadian property for purposes of section 115 of the Act.

.If, as a result of either the domestic laws or the treaty provisions, no income tax is exigible in the U.K. or in Barbados when the shares of the public corporation are disposed of after the five years, whether such result would have any impact on the U.K. or Barbados resident to obtain a refund of the security in respect of the election made under subparagraph 128.1(4)(b)(iv) of the Act.

.Whether any rulings have been requested on the above issues and if so whether they have been given.

.Whether there are any changes being contemplated to the Act, tax treaties or administrative policies which would adversely impact on the subject matter.

Our Comments

In the comments below, we assume that, in the case of the Barbados Convention, the property of the public corporation does not consist principally of immovable property situated in Canada.

Generally, the determination of what security is acceptable under paragraph 128.1(4)(b)(iv) or section 116 of the Act and the renewal or release of such security are the responsibilities of the appropriate Tax Services Office serving the area where the taxpayer is located. Hence, the taxpayer should consult the appropriate Tax Services Office for information and departmental procedures with respect to the release of the security posted under those provisions of the Act. However, in general it does not appear appropriate that the security be released before the disposition of the property in respect of which an election has been made under those provisions of the Act. Under either paragraph 9 of Article 13 of the U.K. Convention or paragraph 5 of Article XIV of the Barbados Convention, Canada reserves the right to tax gains derived by a resident of the U.K. or Barbados, as the case may be, from the alienation of any property if the person

(a)is a national of Canada (in the case of the U.K. Convention) or possesses the nationality of Canada (in the case of the Barbados Convention) or was a resident of Canada for 15 years or more (in the case of the U.K. Convention) or 10 years or more (in the case of the Barbados Convention) prior to the alienation of the property, and

(b) was resident in Canada at any time during the five years immediately preceding the alienation of the property.

It should be noted that the five year period specified in (b) above is not five years after the taxpayer has become a non-resident of Canada. Rather, the conditions in (a) and (b) above must be examined from the time the property at issue is alienated (i.e., disposed of or deemed to be disposed of under the law of Canada). If both conditions are met at that time, Canada reserves the right to tax the gains from the disposition of the property in question. The security held by the Department is a mechanism to ensure the collection of such tax.

Before the disposition of the property in question, even if the taxpayer has emigrated from Canada for 5 years or more, there may be changes in the residential status of the taxpayer which may cause paragraph 9 of Article 13 of the U.K. Convention or paragraph 5 of Article XIV of the Barbados Convention to apply. For example, the taxpayer may be a factual or deemed resident of Canada at some point in time during the five year period immediately preceding the time of the disposition of the property. In such a case the relief provided in the gains Article of the U.K. Convention or the Barbados Convention may not apply. Another example is that at the time of disposition of the property the taxpayer may have become a resident of another country rather than a resident of the U.K. or Barbados. In this case only the tax treaty, if any, between Canada and the other country rather than the U.K. Convention or Barbados Convention is relevant to determine whether Canada has the right to tax the gain. Therefore, it would not be appropriate that the security be released until the property in question is disposed of and a reasonable assurance can be obtained that the conditions described in paragraph 9 of Article 13 of the U.K. Convention or paragraph 5 of Article XIV of the Barbados Convention are not met, and in the case of the U.K. Convention, an amount representing the gain from the disposition of property has been remitted to or received in the U.K. as discussed below.

Subject to the application of paragraph 2 of Article 27 of the U.K. Convention, paragraph 8 of Article 13 of that Convention, unless paragraph 9 of that Article applies, provides relief from Canadian taxation on the gain derived by a resident of the U.K. from the alienation of the shares of a public corporation in Canada. If under U.K. domestic law only the amount of a foreign gain of a U.K. resident remitted to or received in the U.K. is subject to U.K. tax (which we understand is in fact the case at the present time), paragraph 2 of Article 27 of the U.K. Convention effectively limits the relief from Canadian taxation of such gain to the amount so remitted or received. Even if paragraph 9 of Article 13 of the U.K. Convention does not apply, the relief from Canadian taxation under paragraph 8 of that Article only applies to the amount of the gain remitted to or received in the U.K. Therefore, it is all the more important to wait until the disposition of the taxable Canadian property in question to determine what amount of the gain is remitted to the U.K. before the security in respect of the taxable Canadian property is released.

Other than the limitation provided in paragraph 2 of Article 27 of the U.K. Convention discussed above, the fact that the gain from the disposition of the shares of the public corporation in Canada is not taxed under the domestic law of the U.K. or Barbados seems to have no impact on the release of the security posted under subparagraph 128.1(4)(b)(iv) of the Act.

We are not aware of any advance income tax ruling having been issued in respect of the issue of releasing the security posted to the Department in respect of the election made in subparagraph 128.1(4)(b)(iv) or former paragraph 48(1)(c) of the Act.

As you are aware, the Department of Finance announced in News Release #96-066, dated October 2, 1996, that paragraph 128.1(4) of the Act will be amended to provide for a mandatory deemed disposition and reacquisition, immediately before the emigration from Canada, at fair market value of all of an individual's property, including taxable Canadian property, other than property that is:

(i) real property situated in Canada;

(ii) capital property used in, or property described in an inventory of, a business carried on by the individual through a permanent establishment in Canada immediately before that time; and

(iii) property described in subparagraph 128.1(4)(b)(iii), (v) or (vi) of the Act.

These proposed rules, if enacted as described in the aforementioned News Release, will apply to anyone who emigrates from Canada after October 1, 1996. Consequently, there will not be any election under subparagraph 128.1(4)(b)(iv) of the Act to defer the deemed disposition of property immediately before an individual becomes a non-resident of Canada. The security posted, if any, in respect of the tax on the gain from the deemed disposition of property should not be released until the actual disposition of property and the tax on the gain from the deemed disposition is paid.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch