27 February 1990 Ruling HBW40003A F - Canadian Tax Treatment of Shareholdings of Emigrants

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.

February 27, 1990

Dear 19(1)

We are writing in reply to your letter dated January 29, 1990, concerning the tax treatment in Canada on shareholdings of emigrants.  The following comments may be of some assistance.

1.     Under the Canadian tax system, residents of Canada are liable for tax on their taxable income.  Taxable income generally includes the person's overall income (i.e. including income from employment, business, investments, pensions, etc.) from both domestic and foreign sources.  Also included in taxable income is the person's taxable capital gain on the disposition of any property.  Effective 1990, the taxable capital gain is 75% of the gain (i.e. proceeds less cost).  The applicable federal and provincial tax rates progress as taxable income increases.

2.     Non-residents of Canada are subject to a 25% withholding tax on most sources of income arising in Canada.  This rate may be reduced in accordance with a tax treaty.  Where the non-resident was employed in Canada, carried on business in Canada or disposed of taxable Canadian property, he would be liable for tax on his taxable income calculated in a manner similar to that described in "1" above.  However, the calculation would only include income from domestic sources.

3.     Where a person (i.e. individual or corporation) has ceased to be a resident of Canada, he is deemed to have disposed, immediately before that time, of each property that was owned by him for proceeds of disposition equal to the fair market value of the property at that time.  Specifically excluded from this "deemed disposition" are. properties that would have been taxable Canadian properties if the person had been a non-resident immediately prior to emigration.  As mentioned in "2" above, taxable Canadian properties are subject to Canadian tax upon the actual disposition by a non-resident, therefore, eliminating the need for a deemed disposition rule on emigration.

4.     Taxable Canadian property, in addition to real property situated in Canada, includes the following:

a)        A share of the capital stock of a corporation resident in Canada (other than a public corporation).

b)        A share of the capital stock of a public corporation if at any time during such of the period of 5 years immediately preceding the disposition thereof as is after 1971, not less than 25% of the issued shares of any class of the capital stock of the corporation belonged to the non-resident.

In summary, shares that do not fall within (a) and (b) above are deemed to be disposed of upon emigration and subject to tax. Subsequent disposition by the non-resident (i.e. prior resident) is not subject to tax in Canada.  Shares that do meet the definition of taxable Canadian property (i.e. that are described in (a) or (b) above) are subject to tax only when actually disposed of by the non-resident.

5.     Article 13 of the Canada-Germany Income Tax Convention will override our domestic laws (as described in 1 through 4) where the non-resident disposes of taxable Canadian property that is neither immovable property nor shares forming part of a substantial interest in the capital stock of a company of which is a resident of Canada the value of which shares is derived principally from immovable property situated in Canada.  In these situations, the treaty basically allows the state of residence exclusive right to tax.

We have enclosed copies of the relevant domestic law and Interpretation Bulletins that may be of some assistance.  If you require any more information, please do not hesitate to contact us.

We trust you will find this to your satisfaction.

Yours sincerely,

C. SavageA/DirectorProvincial and International Relations Division

Enclosures

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