3 September 1997 External T.I. 9718505 - IMMIGRATION-DEEMED DISPOSITION & ACQUISITION

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:

Taxation of gain on mutual fund accrued while non-resident.

Position:

Deemed disposition and acquisition on becoming resident of Canada, provided mutual fund is not taxable Canadian property.

Reasons:

Law. 971850
XXXXXXXXXX J. Stalker

Attention: XXXXXXXXXX

September 3, 1997

Dear Sirs:

Re: Non-residents - Unrealized Capital Gains

We are writing in response to your letter of May 29, 1997 addressed to the Penticton Tax Services Office which was passed on to us, and in follow-up to our telephone conversation of August 14, 1997 (Stalker/XXXXXXXXXX).

You have described a situation where non-residents, formerly residents of Canada, will be returning to and become residents of Canada. They currently own units of Canadian mutual funds. You are concerned that they will be taxed on the unrealized capital gains on the mutual fund units which will have accrued while they were non-residents when they eventually dispose of the fund units as Canadian residents.

As discussed with you, the portion of a capital gain on units of a mutual fund which accrues before a person becomes resident of Canada is not taxable in Canada unless the mutual fund units fall within the definition of "taxable Canadian property" as defined in paragraph 115(1)(b) of the Income Tax Act (Canada) (the "Act"). A unit of a mutual fund trust which was acquired after the time that a person ceases to be resident in Canada would only be taxable Canadian property if the non-resident person and/or non-arm's length persons own or owned 25% or more of the issued units of the trust, which we presume is not the situation at hand. Paragraphs 128.1(1)(b) and (c) of the Act ensure that the portion of the gain on mutual fund units which are not taxable Canadian property, which accrued while the owner was non-resident, is not taxed in Canada. Those provisions deem a person who becomes resident of Canada to have disposed of such units which are not taxable Canadian property for proceeds equal to their fair market value immediately before becoming resident in Canada and deem the person to have then acquired the units at a cost equal to those same proceeds. Accordingly, the gain which accrued before becoming non-resident is effectively added to the cost of the mutual fund units.

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