9 July 2002 External T.I. 2002-0147935 - Deemed Disposition on Immigration

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principle Issue: What are the tax consequences arising from a disposition of shares of a company listed on a foreign stock exchange where the shares are disposed of by a resident of Canada who acquired the shares when he was a non-resident of Canada.

Position: The shares were deemed to have been disposed of, and reacquired, at fair market value at the time the taxpayer became a resident of Canada. When the shares are subsequently disposed of the taxable capital gain is the proceeds of disposition less the f.m.v. of the shares at the time the taxpayer became a resident of Canada.

Reasons: Subsection 128.1(1)

XXXXXXXXXX 2002-014793
Gilles L. Gosselin
July 9, 2002

Dear XXXXXXXXXX:

Re: Deemed Disposition of Shares on Immigration

We are writing in response to your letters dated May 30, 2002 and May 9, 2001 regarding the tax consequences arising from a disposition of shares and to follow up our telephone conversations of June 18 and 19, 2002 (XXXXXXXXXX/Gosselin). We apologize again on behalf of the CCRA for the delay in responding to your written enquiry.

Our understanding is that you have a client who came to Canada from the United Kingdom (U.K.) in 1998, at which time he owned shares of a U.K. company that are traded on the London Stock Exchange (the "Shares"), and at which time he became a resident of Canada. He subsequently disposed of some of the Shares when he was resident of Canada. You would like to know whether the disposition is taxable in Canada.

Pursuant to subsection 128.1(1) of the Income Tax Act (Canada)(the "Act"), where a taxpayer becomes a resident of Canada at a particular time, the taxpayer is deemed to have disposed of each property (other than property listed in subparagraphs 128.1(1)(b)(i) to (iv) if the taxpayer is an individual) owned by the taxpayer at the particular time for proceeds of disposition equal to fair market value and the taxpayer is deemed to have reacquired each property at the particular time at a cost equal to the proceeds of disposition of the property. The effect of subsection 128.1(1) is to tax in Canada only the portion of the gain on a disposition of property resulting from the appreciation of that property while the taxpayer is resident in Canada.

As a resident of Canada, a taxpayer is taxed on his worldwide income, including dispositions of property. Where a taxpayer subsequently disposes of a property to which subsection 128.1(1) applies, the taxpayer's capital gain (or capital loss, as the case may be) is the proceeds from the disposition of the property less the fair market value of the property (the deemed cost) at the time the taxpayer became a resident of Canada.

However, if the property is situated in another country with which Canada has an income tax convention, Canada's right to tax the gain on the disposition of the property may be limited.

Accordingly, at the time that your client became a resident of Canada, he was deemed to have disposed of each property owned by him (other than property listed in subparagraphs 128.1(1)(b)(i) to (iv)), including the Shares, for proceeds of disposition equal to the fair market value of each property and was deemed to have reacquired each property at the same time at a cost equal to the proceeds of disposition. When your client subsequently disposed of some of the Shares after he became a resident of Canada, he should have reported a capital gain (or a capital loss, as the case may be) equal to the proceeds from the disposition of some of the Shares less their fair market value (their deemed cost) at the time he became a resident of Canada. Based upon the facts as you have described them, there are no provisions in the Canada - U.K. Income Tax Convention that would limit Canada's right to tax the gain from the disposition of some of the Shares when your client was a resident of Canada.

As discussed, our comments above are only to provide you with a general explanation of the law that applies in situations similar to the one you described and they are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R5.

Also as discussed, you should contact Bill Waddy at the Calgary Tax Services Office, whose contact information appears below, who is prepared to help you deal directly with the situation of your client.

If you have any questions or comments relating to any of the matters discussed herein, please do not hesitate to contact the writer at (613) 946-3553.

Yours truly,

for Director
International Division
Income Tax Rulings and
Interpretations Directorate

cc: Bill Waddy
Regional Advisor - International Tax Prairie Division
Harry Hays Building

220 4th Ave. SE

Calgary, Ab. T2G 0L1

(403) 299-3729
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