Principal Issues: Is a Hong Kong resident who disposes of non-income producing land situated in Canada exempt from tax under paragraph 5 of Article 13 of the Canada-Hong Kong Tax Convention (the “Convention”)?
Position: No.
Reasons: Canada is allowed to tax the capital gain under paragraph 1 of Article 13 of the Convention since land is considered to be immovable property, as defined under paragraph 2 of Article 6 of the Convention. The fact that the land was not producing any income from business or property is not relevant in determining if paragraph 1 of Article 13 of the Convention applies.
Le 4 juin 2019
Ms. XXXXXXXXXX Income Tax Rulings Directorate XXXXXXXXXX Yves Grondin (514) 496-7420
2018-078344
Definition of "immovable property" in Income Tax Agreement Signed Between Canada and Hong Kong
This is in response to your request for interpretation of October 24, 2018, in which you wish to know whether the capital gain from the disposition of land in Canada that does not generate income is taxable in Canada if the owner of the land is resident in Hong Kong under the Income Tax Agreement Signed Between Canada and Hong Kong (the "Agreement").
The Facts
- An individual who is a non-resident of Canada (the "Non-resident") resided in Hong Kong for the purposes of the Agreement.
- The Non-Resident disposed of a XXXXXXXXXX (the "Land") located in Canada, in the province of XXXXXXXXXX, to an arm's length third party.
- The disposition of the Land resulted in a taxable capital gain under the Income Tax Act (the "Act").
- During the individual’s non-resident holding period, the Land did not generate any property or business income.
- The Land is taxable Canadian property within the meaning of subsection 248(1) of the Act.
Your Question
Is the capital gain from the disposition of the Land by the Non-resident exempt from Canadian income tax by virtue of paragraph 5 of Article 13 of the Agreement?
Our Comments
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
By virtue of subsection 2(3) and paragraph 115(1)(b), income tax is generally payable when a non-resident realizes a capital gain on the disposition of a taxable Canadian property. The definition of "taxable Canadian property" in subsection 248(1) includes "real or immovable property" in Canada. We understand that the Non-Resident does not dispute that the sale of the Land is taxable under the Act, but contends that the gain should be exempt from income tax in Canada by reason of paragraph 5 of Article 13 of the Agreement.
Under paragraph 1 of Article 13 of the Agreement, the gain to a resident of Hong Kong from the disposal of an immovable property referred to in Article 6 of the Agreement and which is situated in Canada is taxable in that country. Article 6, paragraph 2, of the Agreement states that the term "immovable property" shall have the meaning which it has for the purposes of the relevant tax law of the country in which the property in question is situated and includes, inter alia, rights to which the provisions of general law respecting landed property apply.
In the particular situation, we are of the view that the capital gain from the disposition of the Land by the Non-resident is taxable in Canada under Article 13, paragraph 1, of the Agreement, whether or not that property has generated property income or business income. Indeed, we understand that the reference to Article 6, " Income from Immovable Property", in Article 13, paragraph 1, of the Agreement does not have the effect of reducing the scope of that paragraph. Finally, we are of the view that paragraph 22 of the OECD Commentary on Article 13 of the Model Tax Convention on Income and on Capital supports our conclusion since it specifies that for the definition of immovable property paragraph 1 of Article 13 refers to Article 6.
The capital gain from the sale of the Land is therefore not exempt from income tax in Canada because of paragraph 5 of Article 13 of the Agreement.
We hope that our comments will be useful to you and will answer your questions.
Best regards,
Marie-Claude Routhier
Section Manager
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch