31 October 2000 External T.I. 1999-0010455 - Subsection 70(6) and article XXIX B

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: Interaction between subsection 70(6) of the Income Tax Act and paragraph 5 of Article XXIX B of the Canada-United States Income Tax Convention

Position: See our comments in the letter

Reasons: Interpretation of the law

XXXXXXXXXX 1999- 001045
S. Leung
Attention: XXXXXXXXXX

October 31, 2000

Dear Sirs:

Re: Subsection 70(6) of the Income Tax Act (the "Act") and
Paragraph 5 of Article XXIX B of the Canada-United States
Income Tax Convention (the "Convention")

We are writing in reply to your letter in which you requested our view as to whether subsection 70(6) of the Act, as read in conjunction with paragraph 5 of Article XXIX B of the Convention, would apply to the following hypothetical situation.

The Situation

1. X and Y are husband and wife.

2. X is a resident of the United States (U.S.) and Y is a resident of Canada.

3. X's will leaves all of his capital property to Y and Y's will leaves all her capital property to X.

4. Neither X nor Y utilizes a spousal trust referred to in subsection 70(6) of the Act.

5. Each of X and Y owns capital property both in the United States and in Canada.

Scenario A

X dies while Y survives.

Scenario B

Y dies while X survives.

Our Comments

It should be noted that it is uncommon that for the purposes of the Convention a husband is resident in one country at a particular time while his wife is resident in another country at that time. Paragraph 5 of Article XXIX B of the Convention only operates where the deceased person was immediately before death a resident of the U.S. for the purposes of the Convention. In the response given below, it is assumed that in Scenario A, X was a resident of the U.S. for the purposes of the Convention immediately before death while in Scenario B, Y was not a resident of the U.S. for the purposes of the Convention immediately before death.

Scenario A

Where X dies and is survived by Y, pursuant to paragraph 5 of Article XXIX B of the Convention, both X and Y would be deemed to have been resident in Canada immediately before X's death for the purposes of subsection 70(6) of the Act. As a result, provided that the other conditions stipulated in that subsection are met, the rollover treatment under that subsection would be available such that X is deemed to have disposed of his capital property (wherever situated) immediately before death for proceeds of disposition equal to the adjusted cost base thereof (with respect to depreciable property, for the lesser of the capital cost or the cost amount). The legal representative of X, however, could elect in accordance with subsection 70(6.2) of the Act to have subsection 70(5) of the Act apply instead of subsection 70(6) of the Act.

Scenario B

Where Y dies and is survived by X, paragraph 5 of Article XXIX B of the Convention would not apply because Y was not a resident of the U.S. for the purposes of the Convention immediately before her death. Since X was not a resident of Canada for the purposes of the Act immediately before Y's death, subsection 70(6) of the Act would not apply unless the property of X is transferred or distributed to a trust created by the will of X as referred to in paragraph 70(6)(b) of the Act. Consequently, under subsection 70(5) of the Act, Y was deemed to have disposed of her capital property (wherever situated) for proceeds equal to the fair market value thereof. If the estate of Y is subject to U.S. estate tax in respect of the capital property situated in the U.S. that Y owned immediately before her death, a foreign tax credit for U.S. estate tax paid in respect of such U.S. situs property may be available to be claimed on Y's final income tax return in Canada.

As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

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