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.
Principal Issues: How to determine whether a share derives its value principally from real property.
Position: Gross asset value method.
Reasons: This is the approach recommended by the OECD Commentary for purposes of tax treaties. The definition of "taxable Canadian property" in the Act is intended, generally, to be in line with the definition of "real or immovable property" in our tax treaties.
2011 Canadian Tax Foundation Conference
CRA Round Table
Question 2 - Determination of Whether Shares Derive Their Value Principally from Real Property
Canada's tax treaties generally allow Canada to tax gains derived by a resident of the other contracting state from the disposition of real or immovable property situated in Canada. The definition of real or immovable property in our treaties generally includes a share of the capital stock of a company deriving its value principally from real or immovable property situated in Canada.
In past interpretations, the CRA has stated that in the context of our treaties, in determining whether a share of a company derives its value principally from real or immovable property situated in Canada, one can use the gross asset value method, the net asset value method, or any other method that is appropriate in the circumstances. Moreover, the CRA has maintained that for this purpose it will accept a valuation method that assigns the debt of a company to the assets to which the debt reasonably relates, notwithstanding that paragraph 28.4 of the Commentary on Article 13 of the OECD Model Tax Convention provides that the test will normally be done by reference to the value of the property of the company without taking into account debts or other liabilities of the company. In these interpretations, the CRA has indicated that the same flexibility may not be available when interpreting similar words in the context of the Act.
The 2010 Budget documents announcing that the definition of "taxable Canadian property" in subsection 248(1) would be narrowed to exclude shares of corporations, and certain other interests, that do not derive their value principally from real or immovable property situated in Canada (and certain other property), explained that this measure was intended to bring Canada's domestic tax rules more in line with our tax treaties and the tax laws of our major treaty partners.
A) Does the CRA continue to allow a taxpayer to choose the valuation method in the context of treaties while maintaining a different more restrictive approach in the context of the "taxable Canadian property" definition?
B) In the context of the "taxable Canadian property" definition, how is the test applied in a case where a non-resident disposes of shares in a corporation (the "Parent") that itself holds shares in a subsidiary corporation (the "Subsidiary"). Assume that the Subsidiary does not own any shares of corporations or interests in partnerships or trusts. Moreover, assume there is no change in the asset mix of either corporation in the 60-month period that ends at the time of the sale.
CRA Position
A) In the context of tax treaties, the CRA is of the view that the determination whether a share of a company derives its value principally from real or immovable property situated in Canada should be made by reference to the value of the properties of the company without taking into account its debts or other liabilities. This approach is in line with paragraph 28.4 of the Commentary on Article 13 of the OECD Model Tax Convention. The same approach should be followed when interpreting the "taxable Canadian property" definition in subparagraph 248(1) of the Act.
The CRA appreciates that this change in position on the interpretation of treaties could catch certain non-residents with investments in Canadian entities off guard. Accordingly, the new more restrictive position will initially be applied only with respect to dispositions of properties that are acquired after 2011. Non-resident taxpayers disposing of property that was already held by them in 2011 will continue to be able to choose the valuation method provided that the sale takes place before 2013. For sales of property taking place after December 31, 2012, the CRA will follow the gross asset value method in respect of all property dispositions.
B) Where a non-resident disposes of shares of a Parent corporation that has a Subsidiary, a determination will need to be made of the fair market value (FMV) of the shares of the Subsidiary. Moreover, a determination will need to be made of the proportion of the total gross assets of the Subsidiary that comprises of real or immovable property situated in Canada (and certain other property listed in subparagraphs (d)(ii), (iii) and (iv) of the definition of "taxable Canadian property" in subsection 248(1) which for the purposes of the remainder of our response will be included when we refer to "real or immovable property situated in Canada"). Under the current wording of the "taxable Canadian property" definition, an amount equal to that same proportion of the FMV of the shares of the Subsidiary will be considered real or immovable property situated in Canada of the Parent in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.
On August 27, 2010 the Department of Finance released draft legislation applicable after March 4, 2010, that would prevent indirect "look-through" to the property of the Subsidiary in the event that the shares of the Subsidiary would not themselves be taxable Canadian property at the particular time. If such legislation is enacted as proposed and the shares of the Subsidiary would not themselves be taxable Canadian property, the full value of the shares of the Subsidiary owned by the Parent will be viewed as property other than real or immovable property situated in Canada in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.
Olli Laurikainen
2011-042590
November 2011
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