20 July 2009 Internal T.I. 2008-0301441I7 - Capital gain on foreign property

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.

Principal Issues: Whether a capital gain of a resident of Canada realized on the disposition of inherited foreign land is subject to tax in Canada.

Position: Yes

Reasons: Generally, any capital gain of a resident of Canada is taxable in Canada, whether such property is located in Canada or in another country because Canada taxes its residents on their worldwide income. However, the taxpayer may be entitled to a foreign tax credit in respect of any tax paid to the foreign country.

								July 20, 2009

W. Bell							Headquarters
T1- Adjustments						Income Tax Rulings Directorate
Individual Benefits and Services			Ontario Corporate Tax Division
Summerside Tax Centre					P. Waugh
(905) 721-5221

								2008-030144

Real Property Situated Outside Canada

This is in response to your memorandum of November 12, 2008, to which you attached a letter dated September 7, 2008 from XXXXXXXXXX . He has inquired about the Canadian tax implications relating to the possible sale of land situated outside Canada.

According to his letter, the land in question consists of XXXXXXXXXX land in XXXXXXXXXX . The land belonged to the taxpayer's mother who passed away in XXXXXXXXXX without a will. The taxpayer's father passed away in XXXXXXXXXX . Ownership of the land became the subject of a legal suit in XXXXXXXXXX . The legal title of the land was transferred to the taxpayer and his brother in XXXXXXXXXX , a few days after the court's verdict.

More specifically, the taxpayer's questions are as follows:

(a) If the taxpayer sells the land in XXXXXXXXXX , does he have to report the capital gain for Canadian tax purposes?

(b) What formal documents would be needed when filing the Canadian tax return?

Our Comments

We are not able to provide definitive comments on the situation described above as the information provided is incomplete. For example, we have not been provided with any details regarding the law suit or the judgment. Also, it is not clear but we assume the taxpayer's father inherited the land from the taxpayer's mother in XXXXXXXXXX . Further, there is no mention of the taxpayer's father leaving a will or whether he was a resident or non-resident of Canada. However, we can offer some general comments which may be of assistance to the taxpayer.

Gains from the sale of real property

Generally, a person who is resident in Canada is subject to tax in Canada on all of his or her income (including capital gains) from all sources, including sources outside Canada. Therefore, where a Canadian resident individual has sold real property situated outside Canada that is capital property to the individual, subject to any applicable tax treaty, one-half of the capital gain (i.e., the taxable capital gain) is included in computing the individual's income for Canadian tax purposes.

Whether or not a particular property is capital property to a taxpayer is a question of fact. For information on the factors to be considered in determining if a gain from the sale of real property is on account of capital or income, the taxpayer may wish to refer to paragraph 3 of Interpretation Bulletin IT- 218R, Profit, Capital Gains and Losses from the Sale of Real Estate, Including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa.

Under the Income Tax Act (the "Act"), where a taxpayer disposes of capital property, a capital gain on the disposition is generally equal to the excess of the "proceeds of disposition" over the aggregate of the "adjusted cost base" of the property and any outlays and expenses made by the taxpayer for the purpose of the disposition. The proceeds of disposition is usually the sale price of the property. The adjusted cost base of a property is generally equal to the cost of the property to the taxpayer plus or minus certain adjustments (if applicable). However, where a taxpayer has acquired a capital property as a consequence of a person's death, the taxpayer will generally be deemed to have acquired such property at a cost equal to its fair market value at the time of the person's death.

In the situation described, legal title was transferred to the two brothers in XXXXXXXXXX . Absent any other facts, it appears that title to the land passed to the two brothers as a consequence of the death of their father, which suggests that the two brothers likely acquired beneficial ownership of the land in XXXXXXXXXX . If that is the case and provided that the land is capital property to the brothers, each brother would have to include in income any taxable capital gain realized on the sale of the land (in proportion to their interests in such land). Canada has the right to tax the capital gain pursuant to the Canada-XXXXXXXXXX Income Tax Agreement.

Where the proceeds from the sale of the property are paid in a foreign currency, those proceeds must be converted to Canadian currency using the relevant exchange rate for the day of the sale. The deemed acquisition cost of the property would also be valued in Canadian dollars based on the relevant exchange rate at the time of acquisition.

We note that a Canadian resident individual is generally entitled to a foreign tax credit where the individual is subject to an income or profits tax paid to a foreign government on the sale of property situated in a foreign country. The foreign tax credit (which is a deduction against Canadian tax payable) cannot exceed the amount of the Canadian tax that is payable in respect of the sale of the property.

Our International Tax Services Office (ITSO) handles questions regarding the application of our foreign tax credit rules. Therefore, if the taxpayer has any questions as to whether a particular tax qualifies for the foreign tax credit or how to compute the foreign tax credit, we would encourage him to contact ITSO at 1-800-267-5177.

Documentation

If an individual files a paper return, the individual is not required to submit, with the return, any documents relating to the acquisition and sale of the property. However, the individual should retain these documents for six years in the event that we ask to review them. For the purposes of claiming any foreign tax credit, the individual would be required to include, with a paper return, a document, such as an official receipt, from the foreign government confirming the payment of the foreign tax. If the individual does not file a paper return (i.e., the individual files electronically), the individual should retain all the documents relevant to the acquisition and sale of the property and any documents or receipts regarding the payment of the foreign tax in the event that we ask to review them. An individual would not be required to have any documents or receipts translated into one of our official languages unless requested by us to do so.

Foreign property reporting obligations

The Act imposes an obligation on Canadian resident individuals to disclose information regarding their foreign property holdings. The requirement to disclose foreign property holdings, which is done annually on Form T1135, Foreign Income Verification Statement, should not be confused with the requirement to report any income or gains from property situated outside Canada.

An individual is required to file Form T1135 if the total cost of the individual's specified foreign property exceeds $100,000 Cdn. An individual's specified foreign property includes, among other things, real property situated outside Canada. Where there is joint ownership of the foreign property, each owner's share would be compared to the $100,000 threshold. As we indicated above, notwithstanding that the foreign property reporting obligations may not apply if the value of the land is less than $100,000, a Canadian resident individual would still be required to report any income from the property, or any gain realized from the sale or conversion of the property, in computing income for Canadian tax purposes.

We trust that our comments are of some assistance.

Yours truly,

Jenie Leigh
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch