13 February 1997 External T.I. 9632715 - SOURCE OF CG ARISING ON WIND-UP OF TRUST.

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:

The source of a capital gain arising from a distribution of U.S. securities from a Canadian trust to a U.S. beneficiary for purposes of Article XXII of the Canada-U.S. Treaty.

Position:

Canadian source.

Reasons:

Question of fact.

	                                      	963271
XXXXXXXXXX	                                      	Jim Wilson

Attention: XXXXXXXXXX

February 13, 1997

Dear Sirs:

Re: Article XXII of the Canada-U.S. Income Tax Convention ("Treaty")

This is in reply to your letter dated September 30, 1996 in which you requested our opinion regarding a distribution out of a trust that is a resident of Canada (the "trust"). You described a situation where the trust is being wound up and all of its assets are being distributed to its sole income and capital beneficiary, a resident of the United States (the "U.S. beneficiary"). The trust's assets consist mainly of U.S. securities. You wish to know whether the taxable capital gains arising as a result of the fair market value disposition of the trust's assets pursuant to subsection 107(5) of the Income Tax Act (the "Act"), as would otherwise be subject to Part XIII tax pursuant to the interaction of subsection 104(13) and paragraph 212(1)(c) of the Act, would be exempt from Part XIII tax pursuant to Article XXII of the Treaty.

Income of a trust is generally considered a separate source of income for purposes of Part I and Part XIII of the Act by virtue of paragraph 108(5)(a) and subsection 212(11) of the Act, respectively. Income distributions, including taxable capital gains (see paragraph 17 of Interpretation Bulletin IT-465R), from the trust are considered to be dealt with under Article XXII of the Treaty. Article XXII would reduce the Part XIII tax (ie. where paragraph 212(1)(c) of the Act is applicable) to either 15% or 0%, depending on whether the income earned by the trust arises inside or outside Canada.

With respect to the fair market value disposition of those particular assets of the trust that are U.S. securities as a result of the winding-up distribution made to its U.S. beneficiary, as described in the opening paragraph above, paragraph 2 of Article XXII of the Treaty would apply to deny Canada the right to tax such amounts only to the extent such gains are considered to arise outside Canada. In this regard, reference should be made to paragraphs 3 and 4 of Interpretation Bulletin IT-395R ("IT-395R") which provides the Department's views on the determination of the geographic or territorial source of a taxpayer's capital gain or capital loss on a disposition of property. "In the case of capital property other than real property, the source of the capital gain or capital loss is usually the location at which the sale or disposition took place. .... Generally, the place where a stock or bond is sold is the securities or stock exchange in which it is sold, regardless of the location of the issuer's transfer office. Where a sale is not made through a securities or stock exchange, other factors, such as the location or place of business of the issuer, the issuer's transfer office, the owner of the security or the owner's selling agent, should be considered in establishing where the sale is made."

The comments in paragraph 3 of IT-395R with respect to deemed dispositions of property do not necessarily apply with respect to the dispositions of property arising as a consequence of the winding-up of the trust. In this regard, a factual disposition has occurred and paragraph 107(5)(a) of the Act is deeming the disposition to be at fair market value. Accordingly, it is a question of fact whether the gain resulting from the distribution of the U.S. securities by the trust to the U.S. beneficiary is arising in Canada or the United States.

In our opinion, where U.S. securities have been disposed of by a Canadian trust on the winding-up of that trust, the capital gains arising from that disposition would generally be considered to be income arising in Canada. Accordingly, paragraph 2 of Article XXII of the Treaty will allow Canada to tax such distributions from the trust at a rate of 15%. This interpretation would also be consistent, as we understand, with the U.S. sourcing rules with respect to gains from the sale of personal property. In this regard, the basic principle under section 865(a) of the Internal Revenue Code is that gains from sales of personal property take their source from the place of residence of the seller (eg. the Canadian trust).

Please note that on October 2, 1996, the Minister of Finance announced that certain changes will be made to the Act effective as of that date where, among other things, property is distributed to non-residents. Draft legislation has not yet been released.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.

Yours truly,

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