2016-0658431E5 Article XIII of Canada-U.S. Convention

Principal Issues: Whether shares in a corporation or an interest in a trust are considered to derive their value principally from real property situated in Canada for purposes of Article XIII(3)(b) of the Canada - United States Tax Convention, where at the time of the disposition of the shares or the interest, respectively, the corporation or the trust only hold cash proceeds from the disposition of real property previously held by the corporation or the trust.

Position: No.

Reasons: The shares or the interest would not be considered to derive their value principally from real property for purposes of the Treaty if no real property is held by the corporation or the trust at the time of the disposition.

Author: Hikspoors, Maryann
Section: 248(1); Paragraph 3 of Article XIII of the Canada-U.S. Tax Convention

XXXXXXXXXX                                                                                                                 2016-065843
                                                                                                                                         M. Hikspoors
                                                                                                                                         (613) 673-9003
March 1, 2017

Dear XXXXXXXXXX:

Re:   Article XIII of Canada-U.S. Convention

We are writing in response to your email wherein you requested our views as to whether shares in a corporation that is a resident of Canada or an interest in a trust are considered to derive their value principally from real property situated in Canada for purposes of Article XIII(3)(b) of the Canada – United States Tax Convention (1980) (“Treaty”), where at the time of the disposition of the shares or the interest, respectively, the corporation or the trust only hold cash proceeds from the disposition of real property situated in Canada that was previously owned by such corporation or trust.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In the context of a tax treaty between Canada and another jurisdiction, as well as in the context of the definition of the term “taxable Canadian property” in subsection 248(1) of the Act, the use of the phrase “derived principally from real property” (or a similar expression) allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust.

Whether the value of a share of a corporation or an interest in a trust is derived from real property situated in Canada is determined at the relevant time. For purposes of the definition of “taxable Canadian property” in subsection 248(1) of the Act, such time is any particular time during the 60-month period that ends at the relevant time (5-year look-back rule), while Article XIII(3) of the Treaty does not contain such look-back rule.

Therefore, even though the assets of the corporation or the trust in the situation described above consist of cash proceeds from the disposition of real property situated in Canada, as long as the corporation or the trust do not hold real property situated in Canada (either directly or indirectly) at the relevant time, the value of the shares of the corporation or the interest in the trust cannot be said to be derived from such real property for purposes of Article XIII of the Treaty.

It should be noted though that if the real property was disposed of by the corporation or the trust at any time during the 60 months preceding the disposition of the shares of the corporation or the interest in the trust, such shares or the interest, respectively, would still be considered taxable Canadian property for purposes of the Act. As a result, certain rules in section 116 of the Act should be considered, despite the fact that a gain arising on the disposition of the shares or interest, respectively, could be ultimately exempt from Canadian tax by operation of the Treaty.

We trust that these comments will be of assistance.

Yours truly,

Vitaliy Anissimov
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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