20 November 1989 External T.I. 74205 F - Canada-U.S. Income Tax Convention on Capital Gains

SUBJECT:  Article XIII (9) of the Canada-U.S.  Income Tax Convention (1980) (the "1980 Convention")

This is in response to your memorandum of August 3, 1989 wherein you asked us to review a submission prepared by 19(1) in response to your proposed reassessment of a return filed by his client, 19(1) (the "taxpayer").

24(1)

We are of the view that you have taken the correct approach.  Income tax treaties are generally negotiated for the purpose of eliminating double taxation.  Accordingly, their provisions are intended to be interpreted only as giving relief from tax that would otherwise be assessed under the domestic tax legislation of one of the contracting states.  Under no circumstances can they be interpreted as giving a Contracting State the right to tax income or gains that it does not otherwise have under its domestic law.  Therefore, it is our view that the gain referred to in the phrase "the amount of the gain which is liable to tax in the other State in accordance with this article" found in Article XIII(9), refers to the gain that has accrued since V-Day.  It is only that portion of the gain which is liable to tax under the Canadian Income tax Act and not the full amount of the gain which had accrued from the date of acquisition as contended by 19(1).  It follows then that the amount that is deducted form the gain liable for tax in Canada under the transitional rules set out in Article XIII(9) is the proportion of the gain that the number of months from V-Day to December 31, 1984 is of the number of months the property was held as calculated form V-Day.

Our position is in line with the view that intent of Article XIII(9) was to effect a transition between the status of United States resident under the 1942 Convention and his status under the 1980 Convention.  Prior to 1985 the 1942 Convention would exempt the full amount of the gain that was subject to tax under Canadian domestic legislation (the gain from V-Day).  Under the transitional provisions, in the 1980 Convention the relief therefore is the proportion of the gain from V-Day that accrued prior to December 31, 1984 (before the coming into force of the 1980 Convention).  The monthly reduction method you have proposed produces this result.

In his submission 19(1)  makes the claim that the "Technical Explanation of the Convention"  (the "Technical Notes"), which Canada has agreed reflect the understanding reached during the negotiations, supports the position he has taken.  Having reviewed the several examples that set out how the transitional provisions should be applied, we noted no examples where a Canadian property was acquired prior to December 31, 1971.  Therefore the integration of the Canadian property was acquired prior to December 31, 1971. Therefore the integration of the Canadian V-Day rules to the transitional provisions have not been illustrated.  Because the Technical Notes were prepared by the U.S. treasury department this is an understandable oversight.  In reference however, to the Technical Note extract used by 19(1) on page 2 of his submission, we noted that the beginning of this reference reads as follows:

     "the gain attributable to such person is normally determined by dividing the total gain..."

In our view, the term "normally" gives the Canada adequate scope for taking the interpretation that you have proposed in applying the transitional provisions of Article XIII(9) to a property acquired prior to V-Day without offending the interpretation set out in the Technical Notes.

On page 2 of his submission 19(1)  indicates that the taxpayer, in 24(1) If 19(1) wishes to pursue this further, he should present the appropriate evidence to the Canadian competent authority.

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch