12 June 1997 External T.I. 9703965 - SHARES DERIVING VALUE FROM IMMOVABLE PROPERTY

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 timber properties that are actively exploited would be considered "property (other than rental property) in which the business of the company was carried on" for purposes of paragraph 4 of Article 13 of the Canada-Germany Income Tax Convention

Position:

Yes

Reasons:

This is consistent with previous rulings (files 963869, 952821 and 940304).

Tim Kuss
XXXXXXXXXX 970396

Attention: XXXXXXXXXX

June 12, 1997

Dear Sirs:

Re: Article 13 of Canada-Germany Income Tax Convention

This is in reply to your letter dated February 4, 1997 requesting a technical interpretation regarding the application of Article 13 of the Canada-Germany Income Tax Convention (the "Convention") to the following situation:

• Canco is a Canadian corporation resident in Canada under the Convention.
• All the issued shares of Canco (the "Canco shares") are beneficially owned by persons resident in Germany under the Convention (the "non-resident shareholders") each having a "substantial interest", within the meaning of paragraph 4 of Article 13 of the Convention, in the capital stock of Canco.
• Canco is the beneficial owner of certain freehold land situated in Canada (the "forest land holdings") the value of which is derived from stands of timber located on it.
• Canco carries on the business of harvesting the timber for sale to arm's length mills and other purchasers.
• Substantially all the value of the Canco shares is attributable to its interest in the forest land holdings.

Based on the above situation you have requested our opinion whether a gain on the disposition of the Canco shares by the non-resident shareholders would be exempt from tax in Canada by virtue of Article 13 of the Convention.

As your request appears to deal with a factual situation we are unable to provide our views with respect to the specific transaction which is the subject of your request. Further to paragraph 22 of Information Circular 70-6R3, interpretation requests relating to proposed transactions should be submitted in the form of an advance ruling request, while requests for a written opinion on a completed transaction should be addressed to the appropriate Tax Services Office of Revenue Canada. Nevertheless, we are prepared to make the following general comments which may or may not apply to your situation.

Analysis and Discussion

Pursuant to paragraph 4 of Article 13 of the Convention, gains derived by a resident of Germany from the alienation of shares forming part of a substantial interest of a company resident in Canada the value of which shares is derived principally from immovable property situated in Canada may be taxed in Canada.

For purposes of paragraph 4 of Article 13, the term "immovable property" does not include property (other than rental property) in which the business of the company was carried on. Generally, mineral and timber rights that are beneficially owned by a company and which are actively exploited by the company in the conduct of its business would be considered property (other than rental property) in which the business of the company was carried on and would not be considered immovable property for purposes of paragraph 4 of Article 13 of the Convention.

We hope our comments are of assistance.

Yours truly,

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