Principal Issues: Whether sale of property situated in Scotland exempted from tax in Canada where Scottish tax laws do not tax the gain on disposition?
Position: No.
Reasons: Pursuant to subsections 40(1) and 39(1), a capital gain from the disposition of property would arise in the circumstances described; nothing in the Canada-United Kingdom Income Tax Convention to prevent Canada from taxing the gain under the Income Tax Act.
XXXXXXXXXX 2004-009898 S. Chua November 2, 2004
Dear XXXXXXXXXX:
Re: Sale of residential property in Scotland
We refer to your letter regarding the above matter and write in response to your queries raised. The hypothetical situation you have described is as follows:
1. Miss X is a resident of Canada.
2. Mr. X who was resident in Scotland was Miss X's father. Mr. X wholly owned a property in Scotland (the "Property") that was also Mr. X's residential home.
3. Sometime in December 1995, Mr X transferred his ownership of the Property to Miss X outright for no consideration (the "Gift"). The fair market value of the Property at the time of the Gift was Cdn$94,000.
4. Mr. X continued to reside in the Property until his death on December 1, 2003.
5. Miss X sold the Property to an arm's length purchaser on March 5, 2004 for Cdn$197,000.
6. After the deduction of reasonable expenses (legal costs, real estate agent fees, municipal and other costs) pertaining to the sale of the Property as described above, the gain from the sale was Cdn$85,000.
7. Under Scottish tax laws, Miss X was not taxed on the gain of Cdn$85,000.
You question whether the Canada-United Kingdom Income Tax Convention ("UK Treaty") would operate to exempt from Canadian tax the gain of Cdn$85,000 when computing Miss X's income for the taxation year 2004.
Our Comments
Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.
Based on the above hypothetical facts, pursuant to paragraph 69(1)(c) of the Income Tax Act (the "Act"), as Miss X acquired the Property from Mr. X sometime in December 1995 by way of a gift, she was deemed to have acquired the Property for fair market value, i.e. Cdn$94,000. On March 5, 2004, pursuant to subsections 40(1) and 39(1) of the Act, Miss X's capital gain from the disposition of the Property was Cdn$85,000 which gave rise to taxable capital gain of half the capital gain pursuant to paragraph 38(a). Article 13 of the UK treaty does not impinge on Canada's right to tax Miss X on her worldwide income, which includes the taxable capital gain from the sale of the Property for purposes of paragraph 3(b) of the Act.
We trust that the foregoing will be of assistance to you.
Yours truly
Olli Laurikainen, CA
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch