6 April 1989 Income Tax Severed Letter 5-6707 - [N/A]

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.

K.B. Harding (613) 957-2129

APR 6 1989

Dear Sirs:

This is in reply to your letter of October 4, 1988 concerning the sale of a farm XXXX both of which are U.S. residents.

You have requested our opinion concerning various questions arising with the treatment of paragraph 9 of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention").

Since we do not have all the facts surrounding the disposition of the farm property referred to above we will attempt to respond to your questions based on a hypothetical situation rather than the specific case set out in your letter.

It is our understanding that you are concerned with a situation where a U.S. resident inherits two pieces of property located in Canada in 1980 and in 1985 from U.S. residents.

Your letter stated that the property inherited by the taxpayers in 1980 was deemed to have been disposed of by the deceased in that year and was subject to tax in Canada. You also stated that it was Revenue Canada's position that the deemed disposition was not a sale and accordingly Article VIII of the 1942 Convention would not provide relief from the gain in Canada on the deemed disposition by a U.S. resident. Subsequently, you stated that Revenue Canada took the position that a deemed disposition constituted a "sale or exchange", however, you are uncertain whether a request for refund was subsequently made with respect to the deemed disposition of property of the deceased in 1980.

You indicated that the property deemed to have been disposed of in 1985 could fall within the provisions of the 1942 Convention by virtue of paragraph 5 of Article XXX of the Convention and accordingly no amounts of tax would be required to be paid by the deceased pursuant to Article VIII of the 1942 Convention provided the non-resident did not have a permanent establishment in Canada at the time of her death.

1980 Property

As indicated in you letter, the 1980 property is deemed to have been disposed of by the deceased immediately before death. Paragraphs 70(5)(a) and (b) of the Canadian Income Tax Act (the "Act") deems the deceased to have received proceeds of disposition for both the depreciable property and other capital properties at the values stated therein. Paragraphs 70(5)(c), (d) and (e) of the Act outline the cost which such assets are deemed to be acquired by the taxpayer as a consequence of the death of a taxpayer.

Generally speaking, the term "ownership" for purposes of the Act should be given the meaning of "beneficial" ownership. The attached Interpretation Bulletin IT-437 outlines the position of Revenue Canada in making this determination.

If the individual who inherited the 1980 property was the beneficial owner on the death of the deceased, it is our view that the beneficiary of the testimentry trust would be considered to be the owner of the property for purposes of paragraph 9 of Article XIII of the Convention. Where that beneficiary has "beneficial ownership" of the property on September 26, 1980 and met the other conditions of paragraph 9 of Article XIII of the Convention, he would qualify for the fresh start rule.

Since we have no particulars of the deceased taxpayer, we make no comment on whether or not a permanent establishment existed on the taxpayer's death. Information Circular 75-7R3, a copy of which is attached, outlines the procedures to be followed to obtain a refund of tax. However, a refund in respect of the 1980 taxation year must be made within four years from the end of that year. A copy of section 164 of the Act is enclosed for your perusal.

1985 Property

It is our view that subsection 70(5) of the Act will deem the deceased to have disposed of the property immediately before death and the beneficial owner will be deemed to acquire the property at that time at the values set out therein. Since the beneficial owner will only acquire the property in 1985, paragraph 9 of Article XIII of the Convention will have no application. However, since the beneficial owner will be deemed to acquire the capital asset (other than depreciable property) at a cost equal to the fair market value on March 28, 1985 and depreciable property at a cost based on fair market value (see subsection 70(5)) there would be no requirement to be concerned with the fresh start rule.

We are enclosing a copy of Information Circular 72-17R3 which outlines the procedures to be followed by non-residents of Canada when disposing of real property located in Canada or other taxable Canadian property. It should be noted that recapture of capital cost allowance (depreciation) on depreciable property will also be subject to tax in Canada where such amounts have been claimed by the beneficiaries of the property.

Since the individuals disposing of both the 1980 and the 1985 property did not own such property on the 31 of December 1971 the "V-Day value" would have no application to such taxpayers. Generally speaking, the calculation of the capital gain from the disposition of any property in the year of disposition is the amount, if any, by which the proceeds of disposition exceeds the adjusted cost base of the property and any outlays or expenses to the extent they were made or incurred for the purposes of making the disposition.

The amounts to be allocated to the mineral rights would be a question of fact and where value exists in such rights a reasonable portion of the basis should be allocated to such rights.

Paragraph 4 of Interpretation Bulletin IT-220 (copy attached) outlines the procedures to be followed in allocating a combined proceeds of disposition for a group of properties (i.e. buildings and land). It is our view that grain storage bins, like farm buildings, are attached to land, and constitute real property for purposes of the Act.

We trust these comments will be helpful to you in filing your income tax returns and other returns required on the disposition of property in Canada and we are enclosing a copy of section 70 of the Act for your convenience. We would suggest you contact the Saskatoon District Taxation Office for final details concerning the disposition of the inherited property.

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch