7 August 1990 Income Tax Severed Letter - Interpretation of ambiguities arising from the interaction of the provisions relating to the residence of an individual under the Income Tax Act and the Canada-U.S. Income Tax Convention

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:

This is in response to your letter of May 2 in which you requested our interpretation with respect to certain ambiguities which arise as a result of the interaction of the provisions relating to the residence of an individual under the Income Tax Act (the Act) and the Canada-U.S. Income Tax Convention (1980) (the Convention).

You describe the facts as follows:

• 1. By virtue of the provisions of section 250 of the Act an individual (Mr. X) is a resident of Canada in a particular year.
• 2. For purposes of the Convention, specifically paragraph 2 of Article IV thereof, Mr. X is a resident of the United States in the particular year.
• 3. During the year Mr. X realizes a gain on the disposition of a principal residence (as defined in paragraph 54(g) of the Act) that is located in Canada.
• 4. Mr. X in the particular year transfer real property (assumed to be a capital asset) to a taxable Canadian corporation (Canco) for consideration that includes shares of the capital stock of Canco. It is assumed that Mr. X and Canco have jointly elected in prescribed form and in accordance with subsection 85(6) of the Act.
• 5. In the year Mr. X receives one or more payments of pension benefits under a pension plan that is a registered pension plan for the purposes of the Act. The payments are attributable to services rendered at a time when Mr. X was employed in Canada.

Based on the foregoing, you have asked that we confirm the following:

• (a) Mr. X would be entitled to claim the principal residence exemption in respect of the particular year pursuant to paragraph 40(2)(b) of the Act;
• (b) That the transfer of real property located in Canada to Canco could be effected in accordance with subsection 85(1) of the Act;
• (c) Mr. X would not be required to obtain a section 116 certificate in respect of either of the real estate dispositions described above; and
• (d) With respect to the payment of pension benefits described in paragraph 3(c) above, that Mr. X would be subject to income tax under Part I and not Part XIII of the Act. In the case of periodic pension payments, paragraph 2(a) of Article XVIII of the Convention would apply with the result that the aggregate Part I tax payable by Mr. X would not exceed 15% of the gross amount of such payments.

Given the limited information provided and having regard to the Department's position as stated at the 1987 Canadian Tax Foundation Annual Conference, we agree that:

• 1. Mr. X would be entitled to claim the principal residence exemption in respect of the particular year pursuant to paragraph 40(2)(b) of the Act;
• 2. Provided the real property transferred by Mr. X to Canco is capital property, it would qualify as eligible property as defined in paragraph 85(1.1)(a) and Mr. X would be entitled to effect such transfer in accordance with subsection 85(1) of the Act;
• 3. Mr. X being deemed by section 250 of the Act to be resident in Canada throughout the particular taxation year would not be required to obtain a section 116 certificate in respect of either of the real estate dispositions described above; and
• 4. The pension benefits received by Mr. X would be subject to income tax under Part I of the Act. However, pursuant to paragraph 2(a) of Article XVIII of the Convention, the aggregate Part I tax payable by Mr. X would not exceed 15% of the gross amount of the periodic pension payments.

We trust that our comments will be of assistance to you.