29 December 1992 Income Tax Severed Letter 9234465 - Non-residents and Taxable Canadian Property

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.

923446
M. Eisner
XXXXXXXXXX
(613) 957-2138

December 29, 1992

Dear Sirs:

• This is in reply to your letters of November 10, 1992 and December 28, 1992 in which you asked us about the tax consequences of a situation where an individual makes a gift of property such as an apartment to his son who resides in it.
• With respect to your concern, Canadian income taxes are levied on certain types of income earned by a non-resident. For information on whether an individual is a non-resident, you may wish to refer to pages 45 and 46 of the enclosed guide entitled "Non-residents and deemed residents of Canada". The comments below relate to an individual who is a non-resident for Canadian income tax purposes. The following comments are also based on the assumption that the property involved is an apartment since this appears to be the type of property with which you are concerned and that the apartment was purchased by the non-resident individual so that the son could occupy it.
• An additional consideration is that Canadian income tax laws may be subject to the provisions of a tax convention or agreement between Canada and the foreign country in which the non-resident resides. The comments below are consistent with the Canada - United States Tax Convention and the Canada - Egypt Tax Convention.
• Gains and losses on the disposition of certain types of property referred to as "taxable Canadian property" are taken into account in determining a non-resident's taxable income for Canadian income tax purposes. Since taxable Canadian property includes Canadian real estate, the apartment would be regarded as taxable Canadian property assuming it is situated in Canada. Based on this assumption, we are making the following comments on the situation where a non-resident individual gives an apartment to his or her son who resides in it: (a) When an apartment is gifted by a non-resident to his son, 3/4 of the gain is relevant for the purposes of computing his or her income in Canada. Information on the determination of a capital gain is included in the enclosed Capital Gains Guide. In particular, you may wish to refer to chapters 2 and 3. In connection with these comments, we also note that the non-resident is considered to have sold the apartment at its fair market value at the time of the gift (See page 17 of the enclosed Capital Gains Guide).
• (c) On the basis that the apartment was "personal-use property" (personal-use property includes an apartment that was used mainly for the personal use and enjoyment of an individual's son), the non-resident would not be permitted to take any loss into account in computing taxable income.
• d) The procedures that must be followed in order to comply with the rules in the Canadian Income Tax Act pertaining to a situation where a non-resident disposes of taxable Canadian property are fully described in Information Circular 72-17R3 ("Procedures Concerning the Disposition of Taxable Canadian Property by Non- residents of Canada - Section 116") a copy of which has been enclosed.
• The above comments concerning the tax results to the non- resident in relation to a gift of an apartment would not be any different in respect of the non-resident individual if the apartment was transferred to a trust rather than to the non-resident's son.
• In the event that the non-resident continued to own the apartment until the time of his or her death, the non- resident would be deemed to have disposed of it at fair market value in the year of death and the tax results set out above would be relevant. However, where the son inherited the apartment pursuant to the individual's will, the son, with respect to the Government of Canada, would not have to pay any inheritance tax. We also note that the tax results to the non-resident individual would not be any different if the apartment remained in a trust rather than being inherited by the son.
• For information on the computation of a non-resident's income tax liability which is based on the amount of his or her taxable income, you may wish to refer to the guide entitled "Non-residents and deemed residents of Canada".
• For your further consideration, we are also providing you with comments relating to the income tax implications to the son should the apartment be disposed of at some future time following the transfer of the property from the non- resident. In this regard, capital gains are usually subject to tax. However, there is a special exemption in the Canadian Income Tax Act that applies in the case of a gain on the disposal of a "principal residence". With respect to such a property, the Income Tax Act provides that a taxpayer may deduct the amount determined by the following formula from the gain on the disposition (or deemed disposition) of any property that was the taxpayer's principal residence at any time after the acquisition date:

1 + the number of taxation years ending after
the acquisition date for which the property
was the principal residence and during which
Capital gain on
he was resident in Canada x
disposition
the number of taxation years ending after the
acquisition date during which the taxpayer
owned the property

• For additional information on the principal residence exemption, you may refer to chapter 8 of the Capital Gains Tax Guide.
• Should you require further assistance, you may contact Mr. K. Kavanat (tel. (613) 598-4076) at the Ottawa District Taxation Office. The address of this office is set out below:

Ottawa District Taxation Office
360 Lisgar Street
Ottawa, Ontario
Canada, K1A 0L9

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

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

cc: Ottawa District Taxation Office