18 June 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.

June 18, 1985

XXXX

Mr. K.B. Harding Provincial International Relations Division Revenue Canada - Taxation 875 Heron Road Ottawa, Ontario K1A 0L8

Dear Mr. Harding:

Canada - United States Income Tax Convention (1980) U.S. Citizen Resident in Canada Taxation of Capital Gains Arising From U.S. Stock Market Transactions

As agreed during our telephone conversation, I have set out below my question regarding the treatment of U.S. portfolio capital gains in view of the new Canada - U.S. Income Tax Convention. I would appreciate a reasonably early response since, as I explained to you, I now suspect that the treatment used in my client's 1984 income tax returns may not be considered correct and, if so, a request for a reassessment to reduce the Canadian income taxes in respect of that year should be filed before the period for filing such a request has expired.

Article XXIV, para. 4(a) provides that Canada shall allow a foreign tax credit in respect of U.S. income taxes "except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen".

Article XIII, para. 4 provides, in effect, that U.S. source capital gains, other than from real property and business property sited in the U.S., shall be taxable only in the country of residence.

These provisions, taken alone, would indicate that a U.S. citizen, resident in Canada, would be subject to full Canadian income taxes on such gains and would receive credit for those taxes, against U.S. income taxes payable, in accordance with Article XXIV, para. 4(b).

On the other hand, Sec. 126 of the Canadian Income Tax Act permits a full foreign tax credit against Canadian income taxes, for U.S. income taxes paid on such gains, because that section regards such gains as having a U.S. source. Also, Article XIII, para. 4 is not amongst those provisions specifically made applicable to U.S. citizens by virtue of Article XXIX, para. 3(a).

It has been suggested that, because of the words "need not exceed" contained in Article XXIV, para. 4(a), the correct interpretation is to take the foreign tax credit against Canada, as provided for in Sec. 126, and pay the income tax on such gains to the U.S. This would be on the basis that, while Canada "need not" allow such a deduction, in fact, it does allow it.

In the course of preparing my client's 1984 income tax returns, by virtue of Article XXX, para. 3(b) and Article XXIV, para. 6, we applied the principal to the 1984 returns that Canada would not give a foreign tax credit in respect of U.S. taxes paid on U.S. portfolio capital gains and claimed the credit, for Canadian income taxes paid, against U.S. income taxes on such gains.

There is a secondary question as to whether this is an appropriate interpretation in respect to 1984 income taxes. However, this question becomes academic if you agree that the credit should be claimed in Canada and the tax paid to the United States in any event.

I thank you for your consideration of this matter. I would be pleased to discuss it with you further or provide any additional information if you so wish.

Yours sincerely,