Principal Issues: [TaxInterpretations translation) 1) Would a capital gain realized by a Portuguese citizen resident in Canada from the disposition of an immovable located in Portugal be taxable in Canada?
2) If so, could the individual claim the benefit of paragraph 1 of Article 23 of the Canada - Portugal Convention?
Position: 1) Yes.
2) No.
Reasons: 1) and 2) Wording of the Act and the Canada - Portugal Convention.
XXXXXXXXXX 2009-034601 Yannick Roulier Attention: XXXXXXXXXX
May 17, 2010
Dear Sir:
Subject: Convention between Canada and the Portuguese Republic
(XXXXXXXXXX )
This is in response to your letter of October 28, 2009, in which you requested our opinion on the application of Articles 13 and 23 of the Convention Between the Government of Canada and the Government of the Portuguese Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the "Canada - Portugal Convention") in the following hypothetical situation.
Note that the legislative references below are to the provisions of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)), as amended (the "Act"), in force as of the date hereof.
Hypothetical Situation
- An individual who is resident in Canada and a citizen of Portugal owns an immovable in Portugal.
- The immovable is "capital property" of the individual for purposes of the Act, as defined in section 54.
- In a particular taxation year, the individual disposes of the immovable for "proceeds of disposition" in excess of the "adjusted cost base" of the property, as those terms are defined in section 54.
- This disposition is not taxable in Portugal under the tax laws of that country, according to the information you have provided to us.
Questions
1) Under the hypothetical situation presented, would the capital gain from the disposition of the immovable be taxable in Canada?
2) If so, could the individual claim the benefit of paragraph 1 of Article 23 of the Canada-Portugal Convention so as not to be required to report a taxable capital gain under the Act?
Comments
On the one hand, the individual's capital gain from the disposition of the immovable would generally be taxable in Canada. Under subsection 2(1), Canadian residents are taxed on their worldwide income, including any taxable capital gain arising on the disposition of a capital property, whether the property is situated in Canada or abroad. Article 13 of the Canada-Portugal Convention does not limit this power of taxation of Canada in respect of the individual in the hypothetical situation presented. However, it should be noted that all or part of the capital gain resulting from the disposition of the immovable may be exempted if the immovable qualifies as the individual's "principal residence", as that expression is defined in Article 54.
Paragraph 40(2)(b) generally allows the capital gain realized by a taxpayer from the disposition of a property that was the taxpayer's principal residence at any time after the date of acquisition to be exempted or reduced based on the number of years for which a principal residence designation is made. However, no new designation may be made if such a designation was previously made for that year in respect of another principal residence of the individual. Generally, a principal residence of a taxpayer for a taxation year is a housing unit that is owned, whether jointly with another person or otherwise, in the year by the taxpayer. Under that definition, to qualify as a principal residence, the individual's immovable must be ordinarily inhabited in the year by the taxpayer, by the taxpayer’s spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer.
We refer you to Interpretation Bulletin IT-120R6 - Income Tax Act: Principal Residence, issued on July 17, 2003, and Form T2091 - Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) for more information on this measure. Copies of these documents and other useful information can be found on the Canada Revenue Agency ("CRA") Web site at www.cra.gc.ca.
On the other hand, the individual would not be able to claim the benefit of paragraph 1 of Article 23 of the Canada-Portugal Convention to avoid being required to report a taxable capital gain under the Act. Adapted to the hypothetical situation submitted, this provision provides that the individual could not be subject to Canadian taxation more onerous than that to which a Canadian citizen in the same situation could be subject. The tax treatment available to a Canadian resident individual under the tax legislation of Portugal does not affect the application of the Act and the Canada-Portugal Convention from a Canadian perspective.
We hope you find the above comments of assistance. Please note, however, that they are not binding on the CRA and may, in some circumstances, not apply to a particular situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.