7 March 1991 Income Tax Severed Letter - Non-residents - Recapture of Capital Cost Allowance

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: Non-Residents - Recapture of Capital Cost Allowance

This is in reply to your Round Trip Memorandum dated February 4, 1991 whereby you requested our comments on the Memorandum to you from the Calgary District Office, International Audit Division respecting the above-noted matter.

The Calgary District Office has inquired as to which, if any, provision of the income Tax Act authorizes taxation of non-residents in respect of recapture of capital cost allowance in the following situation:

• 1. A person who was a resident of Canada ceases to be resident in Canada and becomes a resident of the United States.
• 2. While the person was resident in Canada and when be became resident in the United States he owned a rental property in the United States. The person reported the (net) rental income from this property for Canadian income tax purposes while he was a resident of Canada and for purposes of determining his rental income claimed capital cost allowance in respect of the property.

Our Comments

The Calgary District Office is correct in its understanding that there is no deemed disposition of the property for purposes of section 13 of the Act by virtue of the owner ceasing to be resident in Canada. Subsection 48(1) applies only for purposes of Subdivision c (i.e. for purposes of determining capital gains and capital losses).

However, when the property is ultimately (actually or deemed to be) disposed of, any recapture of capital cost allowance resulting from such disposition may be taxable under subparagraph 115(1)(a)(iii.2) provided the non-resident is subject to tax under Part 1 of the Act and provided the non-resident is not exempt from Canadian income tax on such recapture by virtue of an income tax agreement or convention.

In order for a non-resident to be subject to tax under Part 1 of the Act, subsection 2(3) requires that at some time in the year or in a previous year the person must have:

• (a) been employed in Canada,
• (b) carried on a business in Canada, or
• (c) disposed of a taxable Canadian property.

An argument can be made that in order for any income of a non-resident to be taxable under Part 1 it must relate to one of the three abovementioned activities. However, we take the position that, provided subsection 2(3) is satisfied, income of a non-resident of the kind described in paragraph 115(1)(a) may be taxed whether or not it relates to one of the three activities described in subsection 2(3); e.g. recapture of capital cost allowance on the disposition of property that is neither taxable Canadian property nor related to a business carried on in Canada may be included in the income of a non-resident for Canadian tax purposes provided that at some time in the year of the disposition or a previous year the person has undertaken at least one of the three activities.

While subparagraph 115(1)(a)(iii.2) of the Act may authorize the inclusion of the recapture of capital cost allowance in the non-resident's income for Canadian income tax purposes, such income will likely be exempt from Canadian income tax if the non-resident is resident in a country with which Canada has an income tax agreement or convention. For example, in the hypothetical fact situation set forth above, the recapture of capital cost allowance is likely not taxable in Canada by virtue of Article VII or Article XXII of the Canada-United States Income Tax Convention, 1980.