| July 31, 1990 | |
| MONTREAL DISTRICT OFFICE | Specialty Rulings |
| Chief, Audit Division | Directorate |
| D. Yuen | |
| Attention: Régent Laurin | (613) 957-2111 |
| Section 148 | EACC9374 |
| File No. 900361 File No. 900361 |
Subject: Section 85.1 of the Income Tax Act (the "Act") 24(1)
We are writing in response to your memo of March 28, 1990 wherein you requested our comments on the application of section 85.1 of the Act in the following situation:
24(1)
It is your view that subsection 2(3) and 115(1) of the Act indicate that a non-resident is taxable only on capital gains incurred on the disposition of TCP. You have concluded that the exchanged shares fail to meet the definition of capital property described in subparagraph 54(b)(ii) of the Act because their disposition would not result in a capital gain or loss. It is your opinion that, as the exchanged shares are not capital property, they are not subject to the provisions of section 85.1 of the Act.
Comments
Provided that the shares 24(1) were held as capital property by any shareholder, the gain, if any, would be a capital gain. However, a U.S. shareholder would only be subject to tax in Canada if the shares are taxable Canadian property as described in subparagraph 115(1)(b)(iii) of the Act, which we understand is not the case.
The non-resident who disposed of the 24(1) shares did not dispose of taxable Canadian property and there is no suggestion that they are otherwise liable to tax under the Act. On the basis of authorities such an Oceanspan Carriers and Lea-Don, the non-residents are not taxpayers for the purposes of subsection 85.1(1) of the Act. Therefore, the cost of the shares of 24(1) 24(1) will be determined without reference to the rule in paragraph 85.1(1)(b) of the Act.
If the shares were taxable Canadian property, a U.S. shareholder would be a taxpayer and is entitled to the treatment described in section 85.1 of the Act. As will, the U.S. shareholder would be exempt from tax in Canada by virtue of Article XIII of the Canada-U.S. Income Tax Convention (1980) unless the shares are described in subparagraph 3(b)(ii) thereof.
If the U.S. shareholder held the shares of 24(1) inventory, then the income gain might be taxable pursuant to subparagraph 115(1)(a)(ii) of the Act. However, this would only be the case if he carried on business in Canada and the profit on the shares is attributable to a permanent establishment in Canada.
DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch