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.
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to respond to a letter of March 23, 1998, from your Member of Parliament, XXXXXXXXXX, on your behalf, concerning the taxation of family trusts leaving Canada.
Under the Income Tax Act residents of Canada who emigrate are treated as having disposed of, and having realized all accrued gains on, their property, with the exception of certain Canadian sourced property, which is referred to as taxable Canadian property). Where a Canadian trust distributes capital property to a non-resident beneficiary, the trust is treated as having disposed of the property, unless it is taxable Canadian property, and must pay tax on any accrued gain. The exception for taxable Canadian property is due to the fact that, subject to the provisions of Canada’s international tax treaties, Canada has maintained the right to tax gains realized by non-residents on the disposition of taxable Canadian property. In addition, under many of Canada’s tax treaties, Canada has retained the right to tax former Canadian residents on their capital gains on taxable Canadian property they acquired while resident in Canada.
In the 1991 advance income tax ruling which was referred to by the Auditor General in his May, 1996 report, a Canadian trust proposed to emigrate from Canada. Shortly thereafter, the emigrating trust would receive shares in a public corporation from a second trust which was resident in Canada. If the public corporation shares were taxable Canadian property, any accrued gain would not be taxed immediately, but Canada would, subject to treaty, tax any actual gain on the shares once they were actually realized. If the shares were not taxable Canadian property, any accrued gain would be taxed at the time of emigration. Since the public corporation shares owned by the second trust were previously acquired in exchange for shares of a private Canadian corporation, the issue to be determined was whether the private corporation shares which it had given up on the exchange could be taxable Canadian property when owned by a resident of Canada. If so, the Act provides that the exchanged shares will also be taxable Canadian property to the trust.
Based on advice from the Department of Finance concerning the underlying tax policy and legal advice from the Department of Justice, Revenue Canada accepted that the shares were taxable Canadian property to the trust with the result that any accrued gain on the shares would not be taxed at the time of distribution.
The tax policy issues raised by the Auditor General were referred to the House of Commons Standing Committee on Finance for review. In its report, which was released on September 18, 1996, the Committee found that under existing tax policy: Revenue Canada had no basis to refuse to issue rulings which clarified an acknowledged ambiguity in the Act; it was not possible to conclude that the rulings would result in any significant loss in tax revenues; and there was no suggestion of political or other interference in those rulings or any impropriety on the part of any official.
While the Committee found that the specific rulings referred to in the report were issued in accordance with existing provisions of the Act, the majority of its members recommended that changes be made to the Act to address the tax policy issues. The Department of Finance responded to those recommendations on October 2, 1996 by announcing changes to the Act that will be effective as of that date. If enacted as proposed, these changes will ensure that all persons, including trusts, who emigrate from Canada or transfer property from Canada will pay tax on gains on most property that have accrued up to the time of departure or transfer. Exceptions to this rule will include gains that accrue on Canadian real estate and Canadian business property, since Canada always retains the right to tax capital gains on this type of property.
I trust that my comments will be of assistance to you.
Yours sincerely,
Denis Lefebvre,
Assistant Deputy Minister
Policy And Legislation Branch
T. Harris
957-2131
April 20, 1998
980932
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