14 December 1976 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.

J. L. Martin

December 14, 1976

Dear XXXX

Your letter of November 6 to the Department of External Affairs has been forwarded to this Department for reply as we are charged with the administration of Canada's bilateral tax conventions.

We shall reply to your specific inquiries in order.

Remittance of lump sum payment to Belgium on sale of house

Paragraph 1 of Article XIII of the Convention permits Canada to impose an income tax on a taxable capital gain (one-half of a capital gain) realized on the disposition of real property by a resident of Belgium. Thus, if the house is sold while the vendor is a resident of Belgium, the vendor is required to file an income tax return in Canada, declare the taxable capital gain as income, and pay the appropriate tax determined in accordance with the graduated rates of tax applicable to all individuals. Belgium will grant tax relief as described in paragraph 1(a) of Article XXIII. In the event that the house had been a "principal residence" of the vendor prior to his departure, there is a provision in the income Tax Act for excluding a portion of the gain from the tax base. This exclusion is described in paragraph 12 of Interpretation Bulletin IT-120R (attached).

Monthly payments sent to Belgium from personal bank accounts

There is no tax exigible when an individual transfers capital from Canada to another country. Tax is only exigible when income is received or considered to be received by the nonresident. For instance, interest credited to your bank account, whether remitted to you or not, would be subject to tax. That tax is restricted to 15% pursuant to paragraph 2 of Article XI. Belgium will grant a tax credit in accordance with its laws as set out in paragraph 1(b) of Article XXIII.

Superannuation benefits & R.R.S.P. monthly payments

Paragraph 1 of Article XVIII permits Canada to impose a tax on pension benefits arising in Canada and paid to a resident of Belgium. Since the Convention does not restrict the rate of tax at which pension payments may be taxed, the 25% rate specified in our Income Tax Act will prevail. Belgium will grant tax relief as described in paragraph 1(a) of Article XXIII.

C.P.P. and O.A.S. benefits

Pursuant to paragraph 2 of Article XVIII, these payments are taxable only in Canada. 25% will be withheld.

Mutual fund redemptions

If these are shares in a mutual fund corporation, the non-resident would be taxable in Canada on any resulting taxable capital gain only "if at any time during such of the period of 5 years immediately preceding the disposition thereof as is after 1971, not less than 25% of the issued shares of any class of the capital stock of the corporation belonged to the non-resident person, to persons with whom the non-resident person did not deal at arm's length, or to the non-resident person and persons with whom he did not deal at arm's length".

If these are units in a mutual fund trust, the same 25% test would be applied.

Assuming that your interest in the mutual fund, be it a corporation or a trust, is less than 25%, there would be no Canadian tax exigible upon redemption. Although this treatment is in accordance with the provisions of the Income Tax Act, it is also supported by paragraphs 4 and 5 of Article XIII of the Convention.

However, when a person ceases to be a resident of Canada, he is deemed to have disposed of certain properties including shares or units in a mutual fund corporation or a mutual fund trust, as the case may be, in which the person does not have the 25% interest detailed above. We are enclosing information Circular No. 72-23R2 which sets out the tax treatment in such instances. It is doubtful that Belgium would grant tax relief in this instance since the person is considered to have disposed of the property immediately before he ceased to be a resident of Canada, that is, before he became a resident of Belgium. However, it is possible that the appreciation in value before he becomes a resident of Belgium will be excluded from the cost base of the property for Belgium tax purposes. We would suggest that you enquire of the Belgium tax authorities in this regard.

House rents

Canada is permitted to tax rents pursuant to Article VI of the Convention. The payor (tenant) is required to withhold and remit 25% of the gross rental payments regardless of whether they are made to the non-resident directly or indirectly. However, an optional method of determining Canadian income tax liability for rental income is available. This is described in Information Circular No. 72-9 (particularly paragraphs 23 and 36 thereof). This Circular, incidentally, contains many items of interest to the non-resident. Again, Belgium will grant tax relief in accordance with paragraph 1(a) of Article XXIII of the Convention.

We would like to mention one additional point. In the event that a non-resident sells a house situated in Canada, the purchaser is required to withhold and remit an amount on behalf of the non-resident. This is considered to be an installment on account of the non-resident's Canadian tax liability. We are enclosing Information Circular 72-17R2 which details the procedure.

We trust that the foregoing will be of assistance. If you have any additional queries, we would be pleased to be of assistance. In addition, you may wish to direct any specific enquiries to our nearest District Office.

Yours sincerely,

A.C. Bonneau Director Provincial and International Relations Division

Enclosures