20 February 1998 External T.I. 9732065 - DUAL RESIDENT - EMIGRATION

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:

several issues concerning interaction of paragraph 128.1(4)(b) and tax treaties to a dual resident

Position: general comments provided

Reasons:

5-973206
XXXXXXXXXX T. Harris

Attention: XXXXXXXXXX

February 20, 1998

Dear Sirs:

Re: Paragraph 128.1(4)(b) of the Income Tax Act

This is in response to your letter of December 3, 1997 wherein you requested our interpretation of the interaction between paragraph 128.1(4)(b) of the Income Tax Act (the “Act”) and Canada’s income tax treaties. In particular, you have described a situation where an individual is a resident of Canada for purposes of the Act but the individual is considered a resident of another country for purposes of Canada’s income tax convention with that other country. The individual subsequently ceases to be a resident of Canada such that paragraph 128.1(4)(b) will apply to deem the individual to have disposed of each property, other than property described in subparagraphs (i) to (vi) thereof, owned by him at that time for proceeds equal to its fair market value. You have asked for our views with respect to the following:

(a) whether the deemed disposition for purposes of paragraph 128.1(4)(b) of the Act would be characterized as an “alienation” for purposes of Canada’s tax treaties;

(b) where a treaty provides that gains from the alienation of certain property may be taxed in a particular contracting state, the gain arising from the deemed disposition upon cessation of Canadian residence will only be taxable in that contracting state; and

(c) if the property which the individual is deemed to have disposed of for the purposes of paragraph 128.1(4)(b) constitutes shares of a corporation which was not constituted under the laws of Canada or one of its provinces and is not resident in Canada for purposes of the Act, the gain will be considered to arise outside Canada. For these purposes you have asked us to assume that the value of the non-Canadian corporation is not attributable to Canadian real estate. In this regard, you believe that the position set out in paragraph 3 of Interpretation Bulletin IT-395R that any capital gain or loss resulting from a deemed disposition is not considered to be from a foreign source, regardless of the geographic location of the property, is not appropriate where the individual is considered a resident of another country for the purposes of Canada’s tax treaty with that country.

Our Comments

Our comments with respect to the issues raised by you are as follows:

(a) provided that the specific treaty does not define the term “alienation” to exclude such a deemed disposition, it is our view that the deemed disposition under paragraph 128.1(4)(b) of the Act upon ceasing to be resident in Canada would be characterized as an “alienation” for purposes of Canada’s tax treaties;

(b) the response to this issue can only be determined by reviewing the terms of the specific treaty. However, where the terms of a specific treaty provide that gains from the alienation of a property may be taxed in the contracting state in which such property is situated, it is our view that such treaty gives the contracting state in which such property is situated the right (but not an exclusive right) to tax the gains from the alienation of property situated in that country. It does not prevent Canada from also taxing such gains. In this regard, it is only in situations where the treaty provides that gains from the alienation of such property “shall be taxable only” in one or other of the contracting states which would give that contracting state an exclusive right to tax such gains (see for example, paragraph 4 of Article XIII of the Canada - United States Income Tax Convention, 1980); and

(c) the Department’s general position as set out in paragraph 3 of Interpretation Bulletin IT-395R is that any capital gain or loss resulting from a deemed disposition is not considered to be from a foreign source, regardless of the geographic location of the property. Whether the terms of a specific tax treaty would affect Canada’s right to tax any capital gain arising from such a deemed disposition can only be determined from a review of the terms of the specific treaty as it would apply to the particular facts of a given case.

We trust that our comments will be of assistance.

Yours truly,

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

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