Principal Issues: (1) Whether the CRA will consider Mr. A, a resident alien of Switzerland who chooses to be taxed under the modified forfait taxation regime, to be a resident of Switzerland for the purposes of the Canada-Switzerland Tax Treaty? (2) If so, will the gain on the proposed disposition of his Canco shares be exempt from any Canadian income tax pursuant to Article 13 of the Treaty?
Position: (1) Yes (2) Yes
Reasons: (1) Under the modified forfait taxation regime, all the income received by the resident alien from treaty countries is subject to tax under normal Swiss rules. Therefore, paragraph 5 of Article 4 of the Treaty will not apply. (2) Since paragraphs 4 and 7 of Article 13 of the Treaty do not apply to Mr. A's capital gain on the disposition of his Canco shares, the capital gain is only taxable in Switzerland pursuant to paragraph 6 of Article 13 of the Treaty.
XXXXXXXXXX 2006-017580
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayer with respect to the transaction described herein. We also acknowledge the additional information provided in various subsequent letters and e-mail transmissions.
Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
This document is based solely on the facts, proposed transaction and the purpose of the proposed transaction described below. The documentation submitted with your request does not form part of the facts, proposed transaction and the purpose of the proposed transaction and any references thereto are provided solely for the convenience of the reader.
Definitions
In this letter, unless otherwise expressly stated:
(a) "Canco" is XXXXXXXXXX;
(b) "CRA" means Canada Revenue Agency;
(c) "Foreign Co" is XXXXXXXXXX;
(d) "Mr. A" is XXXXXXXXXX;
(e) "Treaty" means the Convention Between Canada and Switzerland for the Avoidance of Double Taxation With Respect to Taxes on Income and on Capital which was signed on May 5, 1997 and came into force on November 27, 1997;
(f) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and,
(g) "taxable Canadian property" has the meaning assigned by subsection 248(1) of the Act.
Facts
1) Mr. A resides in XXXXXXXXXX, Switzerland and he ceased to be a resident of Canada in XXXXXXXXXX having taken up residency in XXXXXXXXXX at that time.
2) Subject to the application of paragraph 5 of Article 4 of the Treaty, Mr. A is a resident of Switzerland as provided by paragraph 1 of Article 4 of the Treaty.
Mr. A has not been, and will not be a resident of Canada under paragraph 1 of Article 4 of the Treaty at anytime during the 5 years immediately preceding the disposition referred to in paragraph 7 below.
3) Mr. A owns XXXXXXXXXX common shares of Canco, a taxable Canadian corporation.
Mr. A's shares of Canco constitute taxable Canadian property.
4) Canco's business is comprised of XXXXXXXXXX. Its assets are not immovable property within the meaning set out in paragraph 4 of Article XIII of the Treaty. Accordingly, the value of the shares of Canco is not derived principally from immovable property for the purposes of paragraph 4(a) of Article XIII of the Treaty.
5) Mr. A, as a resident alien who has not exercised any income-producing activity in Switzerland such as an employment or profession, chooses to be taxed under the modified forfait taxation regime. Under this regime, any income derived from a treaty country (in this case, Canada) that has benefited from tax relief by virtue of Switzerland's income tax treaties will be included in the assessed tax base. In order for the Swiss authorities to determine the correct tax rates at which the Canadian source income should be taxed, the total worldwide income would have to be taken into account. However, if the worldwide income is not disclosed, then the highest tax rate applies.
6) As a result of this regime, Mr. A is subject to Swiss income taxes on income derived from sources in Canada at the normal marginal rates.
Proposed Transaction
7) Mr. A proposes to enter into a transaction on or about XXXXXXXXXX whereby he will dispose of the XXXXXXXXXX common shares of Canco and transfer them to Foreign Co, a private company resident in XXXXXXXXXX, in exchange for common shares of Foreign Co.
Purpose of Proposed Transaction
8) The proposed transaction is part of Mr. A's personal estate planning.
Other information
9) To the best of your knowledge and that of Mr. A, none of the issues involved in this ruling request:
(i) is in an earlier return of the taxpayer or any related person;
(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transaction and the purpose of the proposed transaction and provided the proposed transaction is completed in the manner described above, our rulings are as follows:
A. Paragraph 5 of Article 4 of the Treaty does not apply to Mr. A and he is therefore a resident of Switzerland for the purposes of the Treaty pursuant to paragraph 1 of Article 4 of the Treaty.
B. Mr. A will be exempted from any Canadian income tax on any gain realized on the proposed disposition of the XXXXXXXXXX common shares of Canco as set out in paragraph 7 above, pursuant to paragraph 6 of Article 13 of the Treaty.
Comments
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA as long as the proposed transactions are completed before XXXXXXXXXX. Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:
(a) whether the shares of Canco derive their value principally from immoveable property for the purposes of paragraph 4 of Article 13 of the Treaty;
(b) the facts and circumstances pertaining to the determination of Mr. A's residence under paragraph 1 of Article 4; or
(c) any other tax consequences relating to the facts and proposed transaction other than those specifically set out in the rulings given.
Yours truly,
XXXXXXXXXX
Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch