17 April 2003 External T.I. 2003-0003995 - Disposition of TCP by non-resident

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a resident of XXXXXXXXXX is taxable in Canada on a non-arm's length disposition of land that is a capital property to a resident of Canada for no proceeds of disposition?

Position:     			Yes 

Reasons: The property is taxable Canadian property, the proceeds of disposition are deemed to be at fair market value, and Canada retains its right to tax pursuant to the Canada-XXXXXXXXXX Income Tax Convention.

XXXXXXXXXX 2003-000399
Gilles L. Gosselin
April 17, 2003

Dear XXXXXXXXXX:

Re: Disposition of Taxable Canadian Property

We are writing in response to your letter dated June 17, 2002, which was forwarded to us. We apologize on behalf of the Canada Custom & Revenue Agency for the delay.

In your letter, you state that you have a relative that is a citizen of Canada who has been a resident of XXXXXXXXXX (the "Non-resident"). In XXXXXXXXXX, the Non-resident purchased land in XXXXXXXXXX (the "Property") and the Non-resident plans on transferring to you as a gift a 1/5 interest in the Property each year for the next five years. The present fair market value of the Property is greater than the cost of the Property.

You would like to know how the Income Tax Act (Canada)(the Act) applies to this transaction. We assume that the Property is a capital property and that the transfer of the Property in the manner that you describe can be accomplished legally.

The transaction outlined in your letter is a factual one, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not our practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. If the situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views.

However, we are prepared to offer the following general comments, which may be of assistance:

? Pursuant to paragraph 69(1)(b) of the Act, in each year that the Non-resident disposes of a portion of the Property to you the Non-resident is deemed to have disposed of the portion for proceeds of disposition equal to the fair market value of the portion;

? Pursuant to paragraph 2(3)(c) of the Act, the Non-resident must pay income tax in each year on the taxable income from the disposition of any portion of the Property because it is "real property situated in Canada" and therefore "taxable Canadian property" (TCP), pursuant to paragraph (a) of the definition of TCP in subsection 248(1) of the Act. For more information about dispositions of TCP by non-residents of Canada, please see IT-420R3: Non-residents-income earned in Canada;

? Pursuant to subsection 115(1), the taxable income earned in Canada by the Non-resident includes the taxable capital gain from the disposition of the Property;

? Pursuant to subparagraph 40(1)(a) and paragraph 38(a) of the Act, the taxable capital gain from the disposition of each portion of the Property is 1/2 of the proceeds of disposition (i.e., the fair market value) of the portion less the adjusted cost base of the portion and any expenses incurred for the purpose of making the disposition. For more information about computing taxable income from dispositions of TCP by non-residents of Canada, please see IT-171R2: Non-resident individuals-computation of taxable income earned in Canada and non-refundable tax credits;

? Pursuant to section 116 of the Act, the Non-resident will have to obtain a "clearance certificate" for each disposition of a portion of the Property because it is a disposition of TCP by a non-resident. For more information about how to obtain a clearance certificate, please see Information Circular 72-17R4Procedures concerning the disposition of taxable Canadian property by non-residents of Canada - section 116; and

? Pursuant to Article 13, paragraph 1, of the Canada- XXXXXXXXXX Income Tax Convention, Canada retains its right to tax the gain derived by the Non-resident from the disposition of any portion of the Property.

The Interpretation Bulletins and Information Circulars referred to herein can be viewed at http://www.ccra-adrc.gc.ca/ by following the "forms and publications" link.

Our comments are provided in accordance with the practise outlined in Information Circular 70-6R5. We hope they are of assistance.

Yours truly,

Jane Stalker, Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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