22 October 1997 External T.I. 9710835 - ARTICLE XIII(5) U.S. TREATY (DUAL RESIDENTS)

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 Article XIII(4) of the Canada-U.S. Income Tax Convention would apply when a factual resident of Canada who is a resident of the U.S. for purposes of the Convention (i.e. a dual resident where the "tiebreaker rules" are decided in favour of the U.S.) acquires and disposes (i.e. deemed disposition pursuant to paragraph 128.1(4)(b) of the Act) of property not referred to in Article XIII(1) and (2) while being a resident of the U.S. for purposes of the Convention.

Position:

Yes.

Reasons:

Article XIII(5) would not apply and therefore Article XIII(4) would apply because it appears to be the intention of the Convention and a logical outcome and such a factual resident of Canada should be exempt from Canadian tax with respect to this type of transaction.

	971083
XXXXXXXXXX								Jim Wilson
(613) 957-2123

Attention: XXXXXXXXXX

October 22, 1997

Dear Sir:

Re: Article XIII(5) of the Canada-U.S. Income Tax Convention ("Treaty")

This is in reply to your letter dated April 23, 1997 in which you requested a technical interpretation of paragraph 5 of Article XIII of the Treaty with respect to the situation described below.

An individual resident in Canada moved to the United States in 1994 and became a resident of the United States for purposes of the U.S. tax law. While being resident in the United States the individual retains his ties in Canada and is considered to be a factual resident of Canada for purposes of the Income Tax Act (the "Act"). For purposes of the Treaty, the individual is deemed by paragraph 2 of Article IV of the Treaty to be a resident of the United States after his move to the United States in 1994. The individual acquired capital property in Canada (other than real property as defined in Article XIII of the Treaty or personal property forming part of the business property of a permanent establishment or fixed base in Canada) after his move to the United States. Subsequent to the acquisition of the capital property, the individual severed his residential ties with Canada and paragraph 128.1(4)(b) of the Act deemed the individual to have disposed of and reacquired such capital property at its fair market value. The gain arising as a consequence of the deemed disposition of such capital property, but for paragraph 5 of Article XIII of the Treaty, would have been exempt from taxation in Canada pursuant to paragraph 4 of that Article.

The situation outlined in your letter appears to relate to an actual situation involving a specific taxpayer. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

It is a question of fact whether a person who is a factual resident of Canada could be considered a resident of the United States for the purposes of the Treaty. However, if an individual acquires a capital property of the type described above while being a resident of the United States for the purposes of the Treaty and then is deemed to dispose of the property pursuant to paragraph 128.1(4)(b) of the Act, the gain, if any, realized on the deemed disposition of such capital property by the individual would be exempt from tax in Canada pursuant to paragraph 4 of Article XIII of the Convention.

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