7 July 1990 Income Tax Severed Letter - Tax implications of Canadians investing in U.S. rental property and information on the avoidance of double taxation

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 XXX

This is in reply to your letter of June 15, 1990, concerning recent tax changes in the United States affecting Canadians investing in U.S. rental property and requesting information on the avoidance of double taxation.

We are unable to provide any specific comments with respect to the application of U.S. tax legislation and related reporting requirements. In this regard, we would suggest that you contact the IRS Attache, United States Embassy, Ottawa, K1P 5T1 (613-238-5335). Presumably, the relevance of any change in the U.S. tax laws to a particular investor would depend on the mode and nature of any given investment and the nature and status of the investor.

With respect to the question of eliminating double taxation, the Income Tax Act allows Canadian residents to claim a credit against Canadian tax payable for U.S. taxes paid or accrued, not exceeding the Canadian taxes attributable to the particular U.S. income. In most cases, this will ensure that there is no element of double taxation. Other means of avoiding double taxation require effective tax planning or structuring of Canadian investment in U.S. real estate. This is the realm of professional tax advisors rather than of our Department.

We can, however, provide the following general comments with respect to two particular changes in the U.S. law, which, in part, may have motivated your letter.

A long-standing problem for foreign investors in U.S. property exists because of the system of estate taxation in the United States. The problem is especially troublesome for Canadian investors because of the taxes imposed by the two countries at death.

When a Canadian investor dies with a direct investment in U.S. situs property, the Income Tax Act provides that the taxpayer is deemed to have made a disposition of such property, immediately before death, at its then fair market value for purposes of computing an income tax. However, Canada does not impose a conventional estate, succession or inheritance tax.

At the same time, the U.S. places the Canadian investor within the U.S. estate tax regime and computes a tax based on the "taxable estate" of the decedent. However, the United States does not tax capital gains at death.

As a result, the Canadian investor must absorb a double tax since the U.S. estate tax is not an income tax that qualifies for the foreign tax credit mentioned above.

The Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), which is effective for estates of decedents dying after November 11, 1988, further exacerbated the problem by increasing the estate tax burden for Canadian investors in U.S. property through a substantial increase in rates and changes in the exemptions provided.

TAMRA also introduced rules to provide for mandatory disclosure in the taxpayer's income tax return where the taxpayer takes a position based upon a treaty provision that overrules or modifies a section of the Internal Revenue Code. Even if a tax return is not required to be filed, an information return must be filed to disclose that the taxpayer is exempt or entitled to reduced taxation under the treaty.

The Canadian government has expressed its concern with respect to the above changes and they are being discussed with U.S. officials at meetings taking place this year with a view to amending the Canada-U.S. Income Tax Convention.

We trust that this information may be of some assistance.