1 December 2004 Internal T.I. 2004-0064481I7 - Effect of NAFTA on Income From Time-Share Mexico

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: Whether NAFTA provides some relief for Canadian residents having income from time-share property located in Mexico or gains from the disposition of such property.

Position: No

Reasons: Article 2103 of NAFTA

 							December 1, 2004

	Tonya Agecoutay						Pascal Tétrault
	Client Services
	Calgary Tax Services Office
	220, 4th Avenue SE
	Calgary, Alberta
	T2G 0L1
									2004-006448

Effect of NAFTA on Income From Time-Share in Mexico

We are writing in response to your facsimile of February 27, 2004 regarding the above captioned matter.

You have asked for our comments regarding representations made to a potential investor on the effect of the North American Free Trade Agreement entered into between the Government of Canada, the Government of the United Mexican States and the Government of the United States of America, signed on December 17, 1992 ("NAFTA") to income from and the disposition of time-share property. It was represented that under NAFTA, rental income received by a Canadian resident from time-share property located in Mexico would not be taxed in Canada and the property could be depreciated at an accelerated rate over a period of 7 years. In addition, capital gains resulting from the disposition of the time-share property by a Canadian resident would not be taxed in Canada or the United-States.

COMMENTS

NAFTA has a limited effect on the Canadian Income Tax Act (the Act). Article 2103 of NAFTA provides that NAFTA does not apply to taxation measures except as set out in the said article. Article 2103 confers the predominance over NAFTA of rights and obligations that Canada may have under a tax convention. In addition, Article 2103 does clarify that Article 1102 (National Treatment) and Article 1103 (Most Favored Nation Treatment) does not apply to income tax measures and capital gains and that NAFTA has no effect on non-conforming taxation measures existing at the time NAFTA came into force (January 1, 1994).

After a careful review of NAFTA, we are unable to find any support regarding the submissions that were made. Canadian residents are subject to tax on their world income and that income must be computed according to the Act. Apart from the personal element that may be present in holding this type of property, the capital cost allowance for this type of property would generally be 4% (class 1 of Income Tax Regulation 1100(1)) and therefore such property would not benefit from a preferential treatment. Moreover, the rental income from property located in Mexico would have to be included in the income of the individual resident in Canada on the same basis as if the property was located in Canada and the same principle applies to the capital gain realised on the disposition of such property subject to the provisions of the Convention Between the Government of Canada and the Government of the United Mexican States For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the Convention). The effect of Articles 6 and 13 of the Convention allows for both States to tax the income from the property and the gain resulting from the disposition of the property. Canada would generally provide double tax relief by way of a foreign tax credit under section 126 of the Act.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch