16 August 1988 Income Tax Severed Letter 7-2628 - [Article XIII of the Canada-U.S Treaty and Section 74.2, Attribution Rules]

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.

MEMORANDUM

DATE August 16, 1988

TO: HEAD OFFICE Source Deduction Division Non-Resident Section

FROM: Allan B. Nelson Resource Industries Section Ruling Directorate 957-8284

Attention: E. Hammond

 SUBJECT: Article XIII of the Canada-U.S
                     Treaty and Section 74.2, Attribution Rules

We have been asked to reply to your memo of March 4, 1988 addressed to Ken Major, Specialty Rulings, concerning the above noted items.

In particular you have asked for confirmation that:

(1) for purposes of paragraph 9 of Article XIII for properties held before January 1, 1972, the number of months used in the determination of the exempt portion of the capital gain is calculated commencing January 1, 1972, since it is only then that gains became taxable. Further that the median rule would apply;

and

(2) With respect to Section 74.2, the attribution rules apply only to the period during which the transferor is resident in Canada and the recipient is his spouse. Therefore, if an individual were to transfer property to his wife and they both were to subsequently emigrate and dispose of the property, the transferor would not have to report any portion of the capital gain. At that point there would be only one non-resident vendor/owner (the recipient/wife), and we would therefore issue only one certificate of compliance.

If a transfer is made to a minor, i.e., a person under the age of 18 with whom the transferor does not deal at arm's length, or who is a niece or nephew of the transferor, the rules parallel those applicable to a spouse. That is, the attribution rules do not apply where the transferor is a non-resident of Canada.

Our Comments

1. We concur that for the purposes of paragraph 9 of Article XIII of the Canada-U.S. Income Tax Convention (1980) ("the Convention"), the number of months used in the determination of the reduction to the capital gain for properties held since before January 1, 1972 and disposed of after December 31, 1984, is calculated commencing on January 1, 1972. This is so because capital gains in Canada became taxable after 1971 and it is reasonable to view the monthly accrual of such gains for the purposes of paragraph 9, Article XIII of the Convention as only taking place after 1971.

We also agree that the Median Rule described in ITAR 26(3) of the Act is applicable in calculating the gain, otherwise subject to tax, for the purposes of paragraph 9, Article XIII of the Convention.

We note that if the person alienating the capital asset is an individual, ITAR 26(3) would be subject to any election made previously by that individual pursuant to ITAR 26(7) of the Act.

2. Subject to the following comments, we concur that section 74.2 of the Act applies to attribute capital gains from the "recipient" back to their spouse only with respect to gains sustained in a year throughout which the spouse is resident in Canada and the "recipient" is his spouse. Therefore, it appears that an individual could transfer capital property to their spouse, subsequently leave Canada, have the spouse sell the property and the individual would not have to report any portion of the capital gain attributable to the sale of such property.

There is no general provision similar to section 74.2 of the Act concerning the attribution of capital gains from minors to transferors, except in the case of inter vivos transfers of farm property by a farmer to his child (section 75.1 of the Act). However, subsection 74.1(2) does deal with the attribution of income or loss from property on transfers and loans of property to minors. This subsection is similar to subsection 74.1(1) which discusses the attribution of income from property on transfers and loans of property to a spouse. With this in mind we agree with your comment that the attribution rules do not apply in the case of a transfer to a minor where the transferor is a non-resident of Canada.

We note that new draft section 245 of the Act, if enacted as proposed in Bill C-139, could have application to reallocate income back into the transferor's hands where it is determined that the transfer of property was purely tax motivated.

It is hoped that the above will be of assistance in responding to your queries.

for Director Bilingual Services and Resource Industries Division Rulings Directorate