16 April 1999 External T.I. 9640475 - EMIGRATION

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:

(1) Whether 128.1(4)(b)applies to salary receivable? (2) Whether 128.1(4)(d) applies to dividend declared but not paid where the ex-dividend date is prior to the time the individual cease to be resident? (3) Whether the taxpayer can carry-back capital loss where corp is wound up after departure?

Position:

(1) Yes (2) Yes (3) Yes

Reasons:

(1) Salary receivable is property (2) Such dividend is property (3) 111(9)

XXXXXXXXXX 5-964047
R. Gagnon
Attention: XXXXXXXXXX

April 16, 1999

Dear Sirs:

Re: Emigration

This is in reply to your letter of November 28, 1996, wherein you requested our opinion concerning the application of subsection 128.1(4) of the Income Tax Act (“Act”) to dividends and salary receivable by a Canadian resident who ceases to be resident of Canada. You also requested our views, in light of the proposed changes to migration rules released on October 2, 1996, concerning the tax treatment with respect to shares of a taxable Canadian corporation owned by an individual (other than a trust) at the time he ceases to be resident of Canada and taxable dividends received shortly after that time in the event of the winding-up of the corporation. We apologize for the long delay in replying to your letter.

Comments

Finance Minister released on December 23, 1998, detailed legislative proposals to implement the policies announced in the Notice of Ways and Means Motion of October 2, 1996, concerning taxpayer migration. Finance Minister also released on December 18, 1998, a Notice of Ways and Means Motion relating to the 1998 budget that includes notably proposed changes to subsection 111(9) and section 115 of the Act. For the purposes of our letter, we have assumed that these proposed changes will be enacted as proposed.

We have also assumed, for the purposes of our reply, that the shares of a taxable Canadian corporation mentioned above are “taxable Canadian properties” under the new definition in subsection 248(1) of the Act.

Salary and Dividend Receivable

Amended 128.1(4)(b) of the Act provides that where at a particular time, a taxpayer ceases to be resident of Canada, the taxpayer is deemed to have disposed at the time that is immediately before the time that is immediately before the particular time (the “time of disposition”) of each property owned by the taxpayer (other than, if the taxpayer is an individual, a property described in subparagraphs 128.1(4)(b)(i) to (xii) of the Act), for proceeds equal to its fair market value at the time of disposition, which proceeds is deemed to have become receivable and to have been received by the taxpayer at the time of disposition.

As salary receivable constitutes property and as it is not specifically excluded in subparagraphs 128.1(4)(b)(i) to (xii) of the Act from the deemed disposition rule, we agree with you that paragraph 128.1(4)(b) of the Act would apply to it where an individual ceases to be a resident of Canada. As the proceeds of the salary receivable is deemed to have been received, we would agree that the salary would be included in the income of the individual as employment income. In our view, the amount included in the income of the individual under paragraph 128.1(4)(b) and subsection 5(1) of the Act would not be included in his income a second time under subsections 115(1) and 5(1) of the Act when it is actually received, by reason of subsection 248(28) of the Act which provides that unless a contrary intention is evident, no provision of the Act shall be read or construed to require the inclusion, in computing the taxpayer’s income, of any amount to the extent that the amount has already been included in computing such income earned in Canada for the year or any preceding year.

Similarly, we agree that paragraph 128.1(4)(b) of the Act would apply to a dividend receivable which was declared by a taxable Canadian corporation but not paid until after the individual ceased to be resident in Canada, where the ex-dividend date (or, if none the date of record) is prior to the time the individual ceases to be resident in Canada. As the proceeds of the dividend receivable is deemed to have been received, we agree that the dividend would be included in the income of the individual and would be subject to the normal gross-up and credit provisions in the year of emigration. It is also our view that subsections 212(2) and 215(1) in Part XIII of the Act would apply when the dividend is actually paid to the taxpayer while he is a non-resident. This could lead to an unintended result and we made the Department of Finance aware of that problem.

New section 119 of the Act may provide a special credit in certain cases where the stop-loss rule in new subsections 40(3.7) and 112(3) of the Act apply to an individual who ceased to be resident in Canada, with respect to a capital loss realized after emigration on the disposition of a share that is a taxable Canadian property. New section 119 of the Act is discussed below.

Paragraph 128.1(4)(c) of the Act could have the effect of giving the taxpayer a cost for the right to receive salary or dividend equal to the amount of the proceeds of disposition. When the salary or dividend is later received, the taxpayer would dispose of his right to receive the salary or dividend income. The disposition of this right with a tax cost has no bearing on the taxation of the salary or dividend when it is received by an individual who is a non-resident.

Corporation Wound Up After Emigration

Amended paragraph 128.1(4)(b) of the Act will broaden the types of property that will be deemed to have been disposed of by an individual who ceases to be resident in Canada. The deemed disposition rule will usually apply to shares of a taxable Canadian corporation that are taxable Canadian properties. Certain limited exceptions will be provided if the taxpayer is an individual (other than a trust).

New subsection 40(3.7) of the Act may apply where a taxable Canadian corporation is wound up shortly after an individual emigrates from Canada and the individual who owns shares of the corporation would otherwise realize a capital loss when his shares are disposed of. New subsection 40(3.7) of the Act is a stop-loss rule that may reduce the capital loss of an individual from the disposition of shares of a corporation at a particular time, where the individual was a non-resident at any time before the particular time. In general terms, this stop-loss rule applies where an individual has received taxable dividends (including deemed dividends on the winding-up of a corporation) while a non-resident, and later realizes a loss on the shares in respect of which the dividend were received. Subsection 40(3.7) of the Act will apply to an individual by adapting the corporate stop-loss rule provided in subsection 112(3) of the Act. Accordingly, a capital loss on disposition of shares may be reduced to the extent of the dividends received on those shares by the individual after his emigration.

However, Part XIII tax paid on dividends may be credited under new section 119 of the Act against the tax imposed on the departure gain on the shares. More specifically, section 119 of the Act will allow the individual to deduct, in computing his tax otherwise payable under Part I for the taxation year in which subsection 128.1(4) of the Act treated the individual as having disposed of the shares, the lesser of two amounts. The first amount, described in paragraph 119(a) of the Act, is in effect the amount of tax attributable to the taxable capital gain on the shares. The second amount, set out in paragraph 119(b) of the Act, is the Part XIII tax paid by the individual on dividends that, pursuant to new subsection 40(3.7) of the Act, have reduced the individual’s capital loss from the disposition of the shares. This amount is computed as the proportion of the individual Part XIII tax in respect of dividends in respect of the shares that the subsection 40(3.7) loss reduction is of the total amount of the dividends received on the shares after emigration. A consequential amendment to subsection 152(6) of the Act will ensure that any necessary assessments of tax will be made in order to take account of the effect of new section 119 of the Act.

The net capital loss (after the application of new subsection 40(3.7) of the Act) that may be incurred by the individual should a corporation be wound up in a year following the year an individual emigrates, would be available to be carried back to the year of departure (in accordance with paragraph 111(1)(b) and subsection 111(9) of the Act - 3 year carry-back period) in order to be applied against the taxable capital gain arising in that year from the deemed disposition of the shares, provided that the shares are taxable Canadian properties and are not “treaty-protected properties” (as newly defined in subsection 248(1)). If the net capital loss is realized on the winding-up of the corporation in the year of emigration of the individual and following the departure, the net capital loss can be applied (in accordance with section 114 of the Act) against the taxable capital gain realized in the same taxation year provided that the shares are taxable Canadian properties and are not “treaty-protected properties”. A taxpayer’s “treaty-protected property” at any time means property any gain from the disposition of which by the taxpayer at that time would, because of a tax treaty with another country, be exempt from tax under Part I.

An individual may instead make an election under new subsection 128.1(7) if he realizes a capital loss (after the application of new subsection 40(3.7) of the Act) on the disposition of shares that are taxable Canadian properties, after having emigrated from Canada. New subsection 128.1(7) of the Act in effect allows an individual who has disposed of a taxable Canadian property after emigration to deduct any capital loss arising on the disposition of the property from any gain that arose on emigration, where the property declined in value after the emigrant left Canada. New subsection 128.1(7) of the Act may apply to a taxable Canadian property even if it constitutes a treaty-protected property.

Under new subsection 128.1(7) of the Act, the individual may elect to reduce the proceeds of disposition that were deemed to arise under paragraph 128.1(4)(b) of the Act in respect of the shares by an amount not exceeding the least of: (1) the amount that would be the individual’s capital gain from the deemed disposition of the shares under paragraph 128.1(4)(b), without the application of subsection 128.1(7); and (2) the amount that would be the individual’s capital loss from the disposition of the shares at the time the property is actually disposed of, if the capital loss were determined with reference to every other provision in the Act (including subsection 40(3.7)) but subsection 128.1(7). The same amount is added to the individual’s proceeds of disposition realized at the time of actual disposition. However, this election does not change the deemed cost of the shares pursuant to paragraph 128.1(4)(c) of the Act.

Security for Departure Tax

To reduce the impact of the accelerated tax liability resulting from a deemed disposition on migration, an individual emigrant may choose, in lieu of payment, to post security in respect of the tax on a departure gain on a particular property. The rules with respect to security for departure tax are found in new sections 220.1 and 220.2. The posting of security does not affect the deemed disposition of property pursuant to paragraph 128.1(4)(b) of the Act.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1996, is not binding on the Department in a particular situation.

We trust our comments will be of assistance to you.

Yours truly,

M. Bisson, CGA
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch