18 July 1990 External T.I. 74615 F - Disposition by U.S. Resident of Capital Assets - "Fresh Start Rule"

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.

Subject:  24(1)

We are writing in reply to your memorandum dated December 18, 1989 wherein you requested our comments in relation to certain transaction described herein.

FACTS

The transactions which have occurred during

1.     

2.     

3.      24(1)

4.     

5.     

6.     24(1)

PROBLEM

24(1)

Generally, capital gains, if any, on dispositions by a non-resident of Canada of shares of a corporation resident in Canada (other than a public corporation) would be taxable in Canada by virtue of subparagraphs 115(1)(b)(iii) and (iv) of the Act.

24(1)

Under Article XIII(1) of the 1980 Canada - U.S. Income Tax Convention (the "Convention")

     "Gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other State."

Article XIII(3)(b) states that for the purposes of Article XIII, the term "real property situated in the other Contracting State" in the case of real property situated in Canada means:

     (i)  Real property referred to in Article VI (Income from Real Property) situated in Canada.

     (ii)  A share of the capital stock of a company, the value of whose shares is derived principally from real property situated in Canada."

Article VI of the Convention states

     "For the purposes of this Convention, the term "real property" shall have the meaning which it has under the taxation laws of the Contracting State in which the property in question is situated and shall include any option or similar right in respect thereof.  The term shall in any case include usufruct of real property, rights to explore for or to exploit mineral deposits, sources and other natural resources and rights to amounts computed by reference to the amount or value of production from such resources; ships and aircraft shall not be regarded as real property."

Thus it would be prudent for the Calgary District Office to determine 24(1) In doing so, Article XIII(9) ("the fresh start rule") may be relevant.  As explained at paragraph 12, IT-173R2, the fresh start rule is a transitional rule which reflects the fact that under Article VIII of the 1942 Canada - U.S. Income Tax Convention (the "1942 Convention"), gains derived by U.S. residents from the sale or exchange of capital assets located in Canada were exempt from tax in Canada provided that the U.S. resident did not have a permanent establishment in Canada at any time in the taxation year during which the sale or exchange occurred.  The fresh start rule operates to exempt from tax in Canada the portion, if any, of a capital gain that had accrued during a period ending on December 31, 1984, provided that the non-resident meets the conditions specified in paragraph 9 of Article XIII of the Convention.

24(1)

OTHER

C.     During our numerous telephone conversations (Shey/Chan), you asked us to review our files for a record of discussions between the Rulings Directorate and 24(1) in relation to the aforesaid transactions and corporations.

     We have reviewed our files as requested and have not found any record discussions with 24(1). 

     We have enquired of the individuals who were principals on the 24(1) file in a ruling capacity during 1985 and 1986 regarding consultations or discussions with 24(1) with respect to 24(1) transactions. These individuals have indicated that to their knowledge, there were no discussions nor consultations by the Rulings Directorate with 24(1) concerning the 24(1)

ChiefResource Industries SectionBilingual Services and Resource Industries DivisionRulings Directorate