20 December 1985 Income Tax Severed Letter

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.

December 20, 1985

BY COURIER

Revenue Canada Non Corporate Rulings 875 Heron Road Ottawa, Ontario K1A 0L8

Dear Sirs:

I would appreciate receiving your views on whether Article XIII of the Canada - U.S. Income Tax Convention (1980) applies strictly to capital gains, or whether it encompasses "income" gains as well.

Without limiting the generality of the foregoing, would the following transaction be exempt from taxation in Canada by virtue of paragraph 4 of Article XIII of the Canada - U.S. Income Tax Convention (198) or would it be taxable in Canada under another provision of the Treaty?

Assume that a U.S. resident surrenders for cancellation a "life insurance policy in Canada" to the Canadian Issuer. Pursuant to Sub- section 148(1) and paragraph 115(l)(a)(vi), the gain arising upon such disposition (i.e. the difference between the proceeds of disposition and the adjusted cost base) must be included in the income of the U.S. resident for purposes of determining his Canadian tax liability subject to any relief under the Canada - U.S. Tax Convention (1980) (hereinafter "Tax Convention").

The lump sum payment made to the U.S. resident by the insurance company would not fall under the provisions of Article XVIII of the Tax Convention for the reason that to the extent that the "life.insurance policy in Canada" may be viewed as a "annuity" the lump sum payment would not fall within the term "annuities" as defined in paragraph 4 of Article XVIII since it would not constitute a periodic payment. If Article XIII of the Tax Convention applies to income gains as well as capital gains, then paragraph 4 thereof would appear to exempt the non resident from taxation in Canada.

If on the other hand, Article XIII only applies to capital gains then it would appear that the gain arising from the disposition of the life insurance policy would be subject to Canadian taxation by virtue of Article XXXXII of the Tax Convention. However, if the U.S. resident disposed of such a life insurance policy to a third party in the United States, Article XXXXII of the Tax Convention would also afford protection to the U.S. resident from any taxation in Canada since the source of the income arises in the United States.

It should be noted that the insurance policy does not constitute capital property pursuant to paragraph 54(b) and 39(1) (a) (iii) of the Income Tax Act of Canada.

The only case which I could find dealing with this issue, was the case of Gadsden v. MNR 83 DTC 127 in which it was held that Article XIII of the Canada-U.K. Income Tax Convention applied only to capital gains. However, the Court was swayed by the fact that the article in question had a heading entitled "Capital Gain".

Your comments on the above would be greatly appreciated.

Sincerely yours,