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.
Dear Sirs:
Re: Calculation of Gains Exclusion in Article XIII of the Canada-U.S. 1980 Tax Convention
This is in reply to your letter dated May 15, 1990.
We do not agree with your interpretation of paragraph 9 of Article XIII of the Canada-United States Income Tax Convention, 1980 (the "Treaty").
Paragraph 9 of Article XIII provides, in certain cases as described therein, for the reduction of "the gain that is liable to tax". In our opinion the amount of the gain which is liable to tax under the Income Tax Act does not include any gain relating to the period preceding January 1, 1972 and accordingly no reduction is permitted under paragraph 9 of Article XIII of the Treaty in respect of the gain attributable to the period preceding January 1, 1972 as such pain is not a "gain that is liable to tax".
In the hypothetical example you submitted, land was purchased on January 1, 1960 at a cost of $20,000. The land had a V-day value of $35,000. The land was sold on December 31, 1990 for proceeds of disposition of $100,000.
In our opinion, assuming the vendor is entitled to claim a reduction of the gain pursuant to paragraph 9 of Article XIII of the Treaty, the proportion of the gain that is excluded from taxation is 156/228, i.e. the number of months elapsing from January 1, 1972 to December 31, 1984 divided by the number of months elapsing from January 1, 1972 to the date of disposition, December 31, 1990. This would be applicable in respect of the determination of the vendor's minimum tax under Division E.1 as well as for purposes of determining the vendor's tax liability under Division E of the Income Tax Act. Accordingly, continuing with this hypothetical example, the gain liable to tax under Division E of the Income Tax Act (before any Treaty reduction) is $48,750 (3/4 of $65,000). If paragraph 9 of Article XIII of the Treaty is applicable, the taxpayer is entitled to a reduction equal to 156/228 of this gain, i.e. $33,355.26 and thus the amount to be included in taxable income after the reduction under Article XIII of the Treaty is $15,394.74 ($48,750 - $33,355.26).
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