15 May 1998 External T.I. 9800535 - ARTICLE XIII CANADA-U.S. CONVENTION

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 residency as determined under Article IV of the Canada-U.S. Income Tax Convention is relevant for the purposes of paragraphs 4 and 5 of Article XIII of the Convention? Does the term alienation in the Convention include a deemed disposition pursuant to 128.1(4) of Act?

Position: Yes to both questions.

Reasons:

a) It is clearly stated in Article IV of the Convention that the determination of Residence under that Article is to apply for the purposes of the entire Convention.

b) See response to Question # 40 of 1984 ITF Round Table

XXXXXXXXXX 980053
David R. Senécal

Attention: XXXXXXXXXX (613) 957-9796

May 15, 1998

Dear Sirs:

Re: Article XIII of the Canada-U.S. Income Tax Convention (the “Convention”)

This is in reply to your letter of January 8, 1998, wherein you request our comments regarding the application of paragraphs 4 and 5 of Article XIII of the Convention in the following hypothetical situation:

An individual, who was a resident of Canada for the purposes of the Income Tax Act (the “Act”) for many years, subsequently also became a resident of the United States for the purposes of the U.S. Internal Revenue Code. Although the individual was a resident of both Canada and the United States under their respective domestic income tax laws, the individual was clearly a resident of the U.S. under the “tie-breaker” rules contained in paragraph 2 of Article IV of the Convention from that point in time. A number of years later the individual ceased to be a resident of Canada for purposes of the Act.

At all relevant points in time, the individual owned taxable Canadian property in the form of shares in a non-public Canadian corporation (the “Shares”).

You refer to the fact that the Notice of Ways and Means Motion (re taxpayer emigration) of October 2, 1996, proposes certain changes to the Act whereby anyone who ceases to be a resident of Canada after October 1, 1996, will be treated as having disposed of and reacquired, at fair market value, all property (including taxable Canadian property) other than Canadian real estate, Canadian business property and the properties described in subparagraphs 128.1(4)(b)(iii), (v) and (vi) of the Act.

Comments

In your letter, you appear to have outlined a factual situation which has already taken place and which involves a specific taxpayer. As indicated in Information Circular 70-6R2, requests for a written opinion involving completed transactions should be directed to the appropriate Tax Services Office of Revenue Canada, as responsibility for the review of these transactions lies with such Office. However, we provide the following general comments which may or may not apply to your client and which, in accordance with the above-mentioned Information Circular, are not binding on the Department.

These comments are also given on the understanding that it is a question of fact as to whether an individual is a resident of Canada and whether such a resident of Canada could be considered as being a resident of the U.S. for the purposes of the Convention.

As stated in response to Question 40 at the Revenue Canada Round Table at the 1984 Canadian Tax Foundation Annual Conference, the Department accepts the interpretation of “alienation” contained in the U.S. Treasury Department’s Technical Explanation of Article XIII (Gains) of the Convention, which refers to sales, exchanges, and other dispositions or deemed dispositions under domestic law. Therefore, an alienation for the purposes of the said Article would include a deemed disposition pursuant to the Act of property upon an individual ceasing to be a resident of Canada.

It is our view that, for the purposes of applying paragraphs 4 and 5 of Article XIII (Gains) of the Convention, the residency of the alienator of the property would be as determined under Article IV (Residence) of the Convention. Consequently, if it can be established that an individual who was a resident of Canada for the purposes of the Act was not a resident of Canada for purposes of the Convention as determined under Article IV at any time during the ten years immediately preceding the alienation (i.e., deemed disposition) of the property, any gain arising from such alienation would be exempt from tax in Canada provided that paragraphs 1, 2 or 3 of Article XIII would not otherwise apply to the gain.

We wish to point out, however, that the February 98 Budget proposes to treat as a non-resident any individual who would otherwise be resident in Canada but who, after February 24, 1998, has become entitled under a tax treaty, as a resident of another country to an exemption from or reduction in Canadian income tax. Should this proposal become law, it would no doubt impact on an individual’s ability to postpone the deemed disposition proposed in the above-mentioned Notice and Mean Motion by remaining a resident of Canada until such time as the time limits in paragraph 5 of Article XIII (Gains) are exceeded.

It should also be noted that the time periods specified in paragraph 5 of Article XIII (Gains) must be examined from the time the property at issue is alienated. Consequently, the fact that an individual may have ceased to be a resident of Canada for the purposes of the Act for more than ten years does not automatically mean that Canada will have forfeited its right to tax any gain from an alienation of the property in question. In this regard, it is also important to realize that the property would continue to constitute taxable Canadian property subsequent to any deemed disposition referred to above. Consequently, the conditions in paragraph 5 must be examined both at the time of the deemed alienation of the property and at the time of a subsequent actual disposition of the property by the individual. Therefore, any subsequent changes in the individual’s residential status would have to be examined carefully, not only in terms of determining whether paragraph 5 of the Convention would apply where there is a subsequent return to Canada after ten years but prior to the deemed or actual disposition of the property but also in terms of whether the provisions of any other treaty may instead apply where the individual has taken up residence in a third country prior to the deemed or actual alienation of the property.

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