7 December 1990 Income Tax Severed Letter - Canadian Tax Status of Property Located in the U.S.

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

Re: Canadian Tax Status

We are writing in reply to your letter dated May 31, 1990, addressed to the Department of Finance, concerning Canadian and United States tax implications on certain property located in the United States. The following comments may be of some assistance:

• 1. Residents of Canada are taxable on their world income (including taxable capital gains on the disposition of property located outside Canada). If their world income includes foreign sources that were subject to foreign income taxes, Canada will allow a foreign tax credit.
• 2. There is a tax convention between Canada and the United States (hereinafter referred to as the “treaty”) in effect. Where provisions in the treaty are inconsistent with that of our domestic tax laws, the treaty provision will prevail.
• 3. In order to interpret the treaty, it must be determined in which country you are a resident for tax purposes. Due to the length of time spent in the United States, you may be considered a resident of both Canada and the United States. You should contact the Internal Revenue Service (see below) to determine your status. Where you are a resident of both jurisdictions, Article 4 of the treaty provides “tie- breaker rules” that will determine, for purpose of interpreting the treaty, in which country you will be considered resident.
• 4. It is difficult for us to determine the residency status of an individual for purposes of the treaty without having all specific facts. However, the first tie-breaker rule will establish you as a resident of the country of which you have a permanent home available to you. If you have a permanent home available to you in both countries, then you would be considered a resident of the country with which your personal and economic relations are closer (centre of vital interests). Based on the nature of your letter (i.e. you go to Florida during the winter months), we have made the assumption you are a resident of Canada for domestic law purposes and thus likely a resident of Canada for purposes of interpreting the treaty.
5. The treaty provisions that may be of some relevance are as follows:
• a) Where you are a resident of Canada for purposes of the treaty, Article 13 - paragraph 1 allows the United States, in addition to Canada, the right to tax gains on the disposition of real property situated therein. Accordingly, the disposition of your land in Florida may be subject to United States tax. Article 24 of the treaty (as well as domestic law - see item #1) will allow you to claim a credit against Canadian tax payable for United States tax paid or accrued, not exceeding the Canadian tax attributable to that particular taxable capital gain.
• b) The Canada - United States Income Tax Convention (1942) provided that most gains are taxable in the state of residence only. The Canada-United States Income Tax Convention (1980) provides that gains on the alienation of real property situated in the other contracting state may be taxed in that state. Accordingly, Article XIII, paragraph 9 of the new Convention provides a transitional rule that in effect reduces the gain which is liable for tax in the United States by the portion of the gain attributable from date of acquisition to December 31, 1984. The property must have been acquired prior to September 27, 1980, to be eligible for this reduction. The full gain (i.e. excess of proceeds over cost) on the property will still be taxable in Canada.
• c) Where you are a resident of Canada for purposes of the treaty, the United States would only have a right to tax a gain on the disposition of your mobile home if that home could be categorized as “Real Property”. In this regard, we would require details about the type of mobile home and its connection (if any) to the land situated thereon. For example, if it is of the type that is permanently installed in one place in such a manner that it can not be readily moved, it would likely constitute real property.
• 6. We are unable to provide any specific comments with respect to the amount of United States tax on such a transaction. In this regard, we would suggest that you contact Mr. J. Hook, the IRS Attache, United States Embassy, Ottawa, K1P 5Y7 (613-238-5335).

We trust you will find this to your satisfaction.