28 January 1986 Income Tax Severed Letter 5-0071 - [Subsection 48(1) and 250(5) of the Income Tax Act]

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.

A.A. Cameron (613) 995-1787

Attention XXX

January 28, 1986

Dear Sirs:

Re: Subsection 48(1) and 250(5) of the Income Tax Act (the "Act")

We are writing in response to the copy we received of your letter dated November 11, 1985, which was sent to the Department of Finance, concerning the above-mentioned provisions of the Act. You requested our interpretation of these provisions in a hypothetical situation which may be described as follows:

1. U.S. Co. is a corporation which was incorporated in the U.S. and therefore is a resident of the U.S. for U.S. domestic income tax purposes.

2. U.S. Co. is owned 100% by a Canadian corporation resident in Canada.

3. U.S. Co. is considered a resident of Canada, under the central- management- and-control concept, for the purposes of the Act.

4. The only asst U.S. Co. has is a minority interest in another U.S. corporation which has appreciated in value since its acquisition.

5. U.S. Co.'s year-end is December 31.

6. Pursuant to Article IV of the U.S.-Canada Income Tax Convention (1980) (the "Convention"), U.S. Co. is considered to be a resident, for purposes of the Convention, of the U.S. only.

Based upon the above factors we would agree that the provisions of subsection 250(5) of the Act would apply for U.S. Co.'s taxation year commencing January 1, 1986 for the purposes of computing its income, taxable income earned in Canada and tax payable under Parts I and XIV of the Act.

In our opinion, U.S. Co. would have ceased to be resident in Canada as of January 1, 1986 which is the earliest time it was deemed by subsection 250(5) of the Act to be not resident in Canada. Therefore the provisions of subsection 48(1) of the Act would deem it to have disposed of certain capital properties at the end of its 1985 taxation year. However, since a deemed disposition under section 48 of the Act is considered to be an alienation of property for the purposes of the Convention, paragraph 4 of Article XIII of the Convention would exempt U.S. Co. from taxation in Canada on any gain arising on this deemed disposition other than gains on the alienation of either real property situated in Canada or personal property forming part of the business property of a permanent establishment in Canada (as detailed in paragraphs 1 through 3 of Article XIII of the Convention).

We hope these comments are of assistance to you.

Yours truly,

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