17 July 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.

July 17, 1985

Attention XXXX

Dear Sirs:

This is in reply to your letter dated May 9, 1985, concerning the meaning of the word "gain" as used in Article XIII of the new Canada-United States Income Tax Convention (1980) (Convention).

You have questioned whether the word "gain" includes income such as recapture of capital cost allowance resulting from the sale of Canadian real property which was used to earn rental income or the proceeds of disposition of a resource property which is included in computing income pursuant to sections 59 and 59.1 of the Income Tax Act.

Article VI clearly indicates that "income" from real property falls within that Article. Since the term "income" is not defined in the Convention, it takes on the meaning which it has under domestic law. Accordingly, any recapture of capital cost allowance or any proceeds of disposition of a resource property which has to be included in the income is income for Canadian tax purposes and would clearly fall within Article VI since that Article is more specific than "gains" referred to in Article XIII. When interpreting a passage of a Convention which is not clear, the Income Tax Convention Interpretations Act permits the interpreters to review the background papers and the intention of the negotiators when drafting the Convention. The Department of Finance has confirmed with us that Article XIII was intended to apply only to capital gains. In addition, the new Convention is patterned on the OECD model wherein Article 13 is clearly titled "Capital Gains". Accordingly, it is our view that recapture of capital cost allowance should fall within Article VI of the Convention and not Article XIII.

The reference in paragraph 9 of Article XIII of the Technical Explanation which states "...paragraph 9 applies to a gain described in paragraph 1 even though such gain is also income within the meaning of paragraph 3 of Article VI", is meant to cover a situation where a particular asset may have been treated under Article VIII of the 1942 Convention as a capital gain and which is treated under the new Convention as income. It is our view that paragraph 3 of Article VI merely clarifies that rental income from real property, as well as income from the alienation of such property falls within paragraph 1 of that Article. In addition, paragraph 3 ensures that income from an adventure in the nature of trade will fall within paragraph 1 of Article VI rather than Article XIII of the new Convention.

We trust that the above adequately sets out our position that income realised on the disposition of real property falls within Article VI and not Article XIII of the new Convention.

Yours sincerely,

Original Signed by

Director Provincial and International Relations Division

CGT/jt
New Canada - U.S. Treaty Article XIII
                                            Article VI