9 June 1997 External T.I. 9630875 - CAPITAL GAINS ARTICLE - CONSISTS PRINCIPALLY OF

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:

Article XVI of the Canada-Barbados Agreement - can Canada tax the gain on the sale by a individual resident of Barbados of shares of a holdco whose assets consist of shares of another Canadian company whose principal asset is real property in Canada?

Position:

No, subject to GAAR; however, October 2, 1996 new emigration rules will apply to deem shares to be disposed of on departure.

Reasons:

Because the words "consists principally of" are used in the look-through provision of paragraph 3 of Article XIV. However, GAAR may apply if structure put in place in contemplation of sale of shares, or if residency in Barbados only established for tax purposes and person lives and funds are remitted elsewhere.

963087
XXXXXXXXXX J. Stalker

Attention: XXXXXXXXXX

June 9, 1997

Dear Sirs:

We are writing in response to your letter of September 11, 1996 in respect of the Canada-Barbados Income Tax Agreement (the "Agreement").

You have described a situation where an individual who is a Canadian citizen and who was resident in Canada for ten years or more ceases to reside in Canada and becomes a resident of the Barbados. Prior to ceasing to reside in Canada the individual's assets included 100% of the issued shares of a Canadian resident corporation (Holdco), the shares of which are not listed on a prescribed stock exchange. Holdco's principal asset is shares of a Canadian resident corporation (Realco), the shares of which are not listed on a prescribed stock exchange. Realco's principal asset is real property situated in Canada. After ceasing to reside in Canada for more than five years, and while a resident of Barbados, the individual sells the shares of Holdco, realizing a capital gain.

It is a question of fact whether or not an individual has severed his or her residential ties with Canada. It is similarly a question of fact whether an individual is a resident of Barbados. Provided that it is determined that an individual in your example has ceased to reside in Canada for more than five years and is a resident of Barbados for purposes of the Agreement, it is our position that, since the words "shares ... the property of which consists principally of immovable" are used in the look-through provision in paragraph 3 of Article XIV of the Agreement, the non-resident will not be liable to tax in Canada where the non-resident is disposing of shares of a holding company. However, the Department will consider the application of the general anti-avoidance rule in section 245 of the Income Tax Act (Canada) (the "Act") if it is evident that a structure was put in place in contemplation of a sale of the shares of a particular Canadian company in an attempt to obtain the tax relief provided by the Agreement set out above, such as a transfer pursuant to section 85 of the Act. In addition, the application of section 245 of the Act would be considered if a person has only established "residency" in Barbados for tax purposes when in fact the person is domiciled in another jurisdiction to which the funds from the disposition of such a sale are remitted.

We also note that the provisions of section 116 of the Act apply whether or not there is relief under the Agreement. In addition, the proposed new taxpayer migration rules, contained in the Notice of Ways & Means released by Finance on October 2, 1996, will apply to deem the individual to dispose of and reacquire the shares of Holdco at fair market value at the time of departure from Canada.

You also asked about the interpretation of "five years" as used in subparagraph 5(b) of Article XIV of the Agreement. If an individual who is no longer a resident of Canada was resident in Canada at any time in the 5 years immediately before the date of alienation, Canada may still tax the gain on an alienation of property regardless of paragraph 4 of Article XIV. So, for example, where an individual who is now a resident of Barbados and is a national of Canada disposes of a property on September 1, 1997, the five year period referred to would begin on September 1, 1992.

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