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 gain is exempt from tax in Canada by virtue of Article 13 of the Canada-U.K Tax Convention

Position: Gain is exempt only if the greater part of the value of shares of the Canadian corporation is not derived from immovable property

Reasons: See Article 13

XXXXXXXXXX 982515
D. Boychuk
Attention: XXXXXXXXXX

November 30, 1999

Dear Sirs:

Re: Canada-U.K. Income Tax Convention (the "Convention")

We are writing in response to your letter of September 29, 1998 wherein you requested our views on the application Article 13 of the above-noted Convention in the circumstances described below.

Background

An individual (the "Taxpayer") is resident in the U.K for purposes of the Convention. The Taxpayer owns all the issued and outstanding shares of a private corporation and taxable Canadian corporation ("Canco") which does not qualify as a "non-resident-owned investment corporation." Canco's only asset is shares of a "public corporation" ("Pubco") which are listed on the Montreal and Toronto Stock Exchanges. Pubco is an integrated real estate development and investment corporation which carries on activities directly and through subsidiary corporations in Canada and abroad. You have asked us to assume that Canco holds less than 1% of the issued and outstanding shares of Pubco.

Paragraph 5(a) of Article 13 of the Convention provides that gains from the alienation of:

shares, other than shares quoted on an approved stock exchange, deriving their value or the greater part of their value directly or indirectly from immovable property situated in a Contracting State or from any right referred to in paragraph 4 of this Article,

. . .

may be taxed in that State.

Under the terms of Article 13, gains from the alienation of shares, other than shares referred to in paragraph 5 (which do not, by virtue of paragraph 6, include shares where the holder and/or the holder and related or connected persons own less than 10% of the shares of each class) are taxable only in the state in which the alienator is resident.

Issues

You have asked us whether any gain realized by the Taxpayer on the alienation of the shares of Canco is exempt from Canadian tax by virtue of Article 13 of the Convention. It is your view that any gain realized on the alienation of the Canco shares by the Taxpayer should be exempt from Canadian tax since the shares of Canco derive their value directly from the shares of Pubco. You suggest that Article 5 of the Convention would not apply to look-through the shares of Pubco since any gain on the Pubco shares realized by a resident of the U.K. would not be subject to Canadian tax. Assuming, however, that a gain from the alienation of the shares of Canco may be subject to tax in Canada, you have asked us whether the value of the shares of Pubco are considered to be derived from the underlying assets (excluding goodwill) or from the income-earning operations and goodwill of Pubco.

Our Comments

In your letter, you have outlined what may be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R3, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request for an advance income tax ruling cannot be considered where the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments which we hope will be of assistance.

A share of a private corporation ("PC") owned by a non-resident is taxable Canadian property and, therefore, any gain realized on the disposition of such a share will be subject to tax in Canada unless the gain is exempted from tax by virtue of a tax convention between Canada and the state in which the shareholder is resident.

Where, under terms of a tax convention, a gain on a share of a PC is not subject to tax in Canada unless the greater part of the value of the share is derived directly or indirectly from specified property situated in Canada, the value of the share of the PC which is derived from the specified property will depend upon the value of that type of property owned directly by the PC and indirectly by any entity ("lower-tier entity") in which the PC has an interest. This look-through approach applies to a share of every lower-tier entity even if a gain realized on the disposition of that share would not be subject to tax in Canada if it was owned by the shareholder of the PC.

In our view, the value of the Canco shares is derived indirectly from the property owned by Pubco. Consequently, assuming the greater part of the value of the Pubco's property is attributable directly or indirectly to immovable property situated in Canada, the greater part of the value of the Canco shares will be attributable to such property.

It is not our practice to comment on the use of valuation methods or techniques. For guidance, please refer to Information Circular 89-3.

We trust that our comments will be of assistance.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.

Yours truly,

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

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