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 paragraph 2 of Article 27 of the U.K. Tax Convention applies to limit the relief that Canada would otherwise have to provide under Article 13 of the Convention where a U.K. resident, that is taxed on the "remittance" basis, disposes of shares of a Canadian resident corporation by way of gift?

Position: Yes

Reasons: In the above circumstances, if paragraph 2 of Article 27 did not apply, the accrued gain on the property disposed of would not be taxed in Canada or the U.K. Such a result was not intended under the Convention.

XXXXXXXXXX
		Tim Kuss

Attention:  XXXXXXXXXX 	970973

July 21, 1998

Dear Sirs:

Re: Article 27, Paragraph 2 of the Canada-U.K. Income Tax Convention

This is in reply to your letter dated April 7, 1997 regarding the above-referenced matter.

Background

Persons who are resident but not domiciled in the U.K. are subject to income tax in the U.K. on income derived from sources in the U.K. and on income derived from sources outside the U.K but that has been remitted to the U.K. (hereinafter referred to as the "remittance basis" of taxation).

Paragraph 2 of Article 27 of the Canada-U.K. Income Tax Convention (the "Convention") provides that where under a provision of the Convention a person has been otherwise relieved from tax in a Contracting State on income that is subject to tax in the other Contracting State on a remittance basis, the relief provided under the Convention in the first-mentioned State on such income shall apply only to the amounts remitted.

You have requested our opinion on the application of the above provision in circumstances where a person resident in the U.K., that is taxed on a remittance basis, has disposed, by way of gift, of shares of a private corporation resident in Canada. For purposes of this discussion we are assuming that, absent the possible application of Article 27, paragraph 2 of the Convention, any gain on the disposition would be exempt from tax in Canada pursuant to paragraph 8 of Article 13 of the Convention.

Analysis and Discussion

The broad purpose of paragraph 2 of Article 27 of the Convention is to limit the relief that must be provided by the source state under the Convention, as it applies to residents taxed on the remittance basis, to income that will be "subject to tax" in the state of residence. To state another way, it is not intended that the Convention enable a person taxed on the remittance basis to avoid paying tax in both Contracting States on particular items of income.

It is our understanding, based on discussions with your office, that under U.K. tax law where a capital property has been disposed of by gift, the person that acquires the property obtains fair market basis in the property (under paragraph 69(1)(c) of the Income Tax Act (the "Act") the person would have fair market value basis for Canadian tax purposes). In the above example, if paragraph 2 of Article 27 of the Convention did not restrict the relief that Canada would have to provide, the share disposition would not be taxable in Canada or the U.K. at the time of the gift and any accrued gain on the property would be permanently "forgiven" by both States. Acceptance of such a position would result in numerous tax avoidance opportunities that, in our view, are not intended.

In our view, such a result is not intended by the Convention. Therefore, in the above fact pattern, it is our opinion that, as a result of the application of paragraph 2 of Article 27 of the Convention, paragraph 8 of Article 13 of the Convention would not apply to restrict Canada's right to the tax any gain on the disposition of the shares.

In two previous opinions given to your office, regarding gains on deemed dispositions on death, we concluded that Article 27, paragraph 2 of the Convention would not be applied to limit the relief provided by paragraph 8 of Article 13 of the Convention in part on the basis that such gains could not be "remitted or received" as referred to in that paragraph. We have a certain amount of sympathy in the case of the deemed disposition on death and distinguish it from the case at hand. Since estate tax would be paid to the U.K. on the deemed disposition on death, the application of paragraph 2 of Article 27 would result in double taxation which is contrary to the intent of the Convention. Since double taxation would not result from the deemed disposition arising on a gift, we believe that paragraph 2 of Article 27 was intended to apply to preserve Canada's right to tax the gain.

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
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