19 October 1989 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.

Revenue Canada Taxation MEMORANDUM

DATE October 19, 1989

TO/A SPECIALTY RULINGS DIRECTORATE
          Reorganization & Non-Resident
          Division

          M.A. Hiltz
          Director

FROM/DE Non-Resident
                  Taxation Division
                  G. Lalonde
                  957-03122

SUBJECT:  Article XIII/Canada - U.S.
              Tax Convention

Tax Convention Paragraph 9 of Article XIII of the Canada- U.S. Tax Convention provides a transitional rule whereby a resident of the U.S. is exempt from tax in Canada on that portion of the capital gain arising from the disposition of capital property that has accrued during the period prior to December 31, 1984.

The calculation of the exempt portion of the gain involves dividing the total gain which would otherwise be subject to tax in Canada by the full calendar months the property was owned by the non-resident person and multiplying by the number of full months that the property was owned prior to December 31, 1984.

The Convention uses the expression "gain which is liable to tax in that other State". Our question pertains to whether the use of the expression "gain" in the Convention has the same meaning as it does in paragraph 40(1)(a) of the Income Tax Act, i.e., proceeds less adjusted cost base and outlays and expenses, or does it simply refer to the remainder obtained when the adjusted cost of the property is deducted from the proceeds. Depending on what the proper interpretation is, the calculation of the exempt portion of the gain will be affected. When outlays and expenses are deducted from the total gain before proration, the resulting taxable capital gain will always be higher. Please refer to the attached for examples of the different calculations.

We would appreciate your comments on the matter discussed above.

K. Hillier A/Director Non-Resident Taxation Division

Attach.