15 October 1997 External T.I. 9713855 - ARTICLE XIII CANADA-ISRAEL TAX TREATY

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:

Does Canada have the right to tax gains of a taxpayer from the deemed disposition of real property situated in Israel as a result of the taxpayer's ceasing to be resident in Canada?

Position: Yes

Reasons:

The Canada-Israel Income Tax Convention does not prohibit Canada to impose tax on such gains.

971385
XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

October 15, 1997

Dear Sirs:

Re: Article XIII of the Canada-Israel Income Tax Convention

We are writing in reply to your letter of May 20, 1997 in which you requested our interpretation of Article XIII of the Canada-Israel Income Tax Convention ("the Convention") as it applies to the situation described below.

A taxpayer who has been a resident of Canada all his life is contemplating emigrating to Israel. He owns real estate situated in Israel. The fair market value of the real estate situated in Israel at the time of emigration will be substantially greater than its adjusted cost base.

You requested our view as to whether the taxpayer will be deemed to have disposed of the real property in Israel pursuant to paragraph 128.1(4)(b) of the Income Tax Act (Canada) (the "Act") and whether paragraph 1 of Article XIII of the Convention gives Israel an exclusive right to impose tax on the gains from the alienation of the real property situated in Israel or whether Canada may also impose income tax on the deemed disposition of the property as a result of the taxpayer ceasing to be resident in Canada.

Our Comments

Paragraph 128.1(4)(b) of the Act states that where at any particular time a taxpayer ceases to be resident in Canada, he shall be deemed to have disposed of, immediately before the time that is immediately before the particular time, each property owned by him other than those properties described in subparagraphs 128.1(4)(b)(i) to (vi) of the Act. On October 2, 1996 the Minister of Finance tabled a Notice of Ways and Means Motion to amend certain provisions of the Act with respect to the migration rules such that a taxpayer can no longer elect to treat a property to be taxable Canadian property under subparagraph 128.1(4)(b)(iv) of the Act and all property, except certain property,¹ are deemed to have been disposed of prior to the taxpayer ceasing to become a non-resident of Canada. In the situation described above, the taxpayer who ceases to be resident in Canada is therefore deemed to have disposed of, among other things, the real property situated in Israel prior to his ceasing to be resident in Canada. In general, as the property is deemed to have been disposed of while the person is a resident of Canada, none of the bi-lateral tax treaties entered into by Canada and the other countries would prohibit Canada from taxing the gains realized from such deemed disposition of property.

Paragraph 1 of Article XIII of the Convention states that gains from the alienation of immovable property may be taxed in the Contracting State (in this case, Israel) in which such property is situated. In interpreting that paragraph for Canadian tax purposes, the word "alienation" used in that paragraph includes deemed disposition referred to in paragraph 128.1(4)(b) of the Act. The paragraph gives Israel the right (but not an exclusive right) to tax the gains from the alienation of immovable property situated in Israel where the person who alienates such property is a resident of Israel or not. It does not prevent Canada from taxing such gains. In this regard, notice that the words "may be taxed" are used in paragraph 1 of Article XIII of the Convention, not the words "shall be taxed only" used in paragraphs 2 and 4 of that Article. Only the latter words would give an exclusive right to tax to the Contracting State referred to following those words.

Whether Israel considers such deemed disposition to be an alienation of property in applying paragraph 1 of Article XIII of the Convention for Israeli tax purposes would depend on its domestic law and we are not in a position to comment on this issue. If Israel considers such deemed disposition to be an alienation of immovable property situated in Israel and imposes Israeli income tax on the gains from such alienation, Canada will, subject to the provisions of the Act, provide a foreign tax credit for such Israeli tax.

If Israel does not consider such deemed disposition to be an alienation of property in applying paragraph 1 of Article XIII of the Convention for its domestic law purposes, there will not be any income tax liability in Israel in respect of that property in the year of emigration to Israel. Upon subsequent alienation of such property by the taxpayer, double taxation may occur if the cost base of such property to the taxpayer for Israeli tax purposes has not been stepped up to its fair market value at the time of emigration to Israel. In such a case, we are not aware of any provisions in the Convention or the Act that will provide a relief from such double taxation.

We trust you will find the above to be of assistance.

Yours truly,

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

ENDNOTES

¹ that is, real property situated in Canada, capital property used in, or property described in an inventory of, a business carried on by the taxpayer through a permanent establishment in Canada immediately before the time of ceasing to become a non-resident of Canada, and property described in subparagraph 128.1(4)(b)(iii), (v) or (vi) of the Act.