M. Carsley (613) 957-2128
XXXX
March 29, 1988
Dear Sirs:
This is in reply to your letter of January 11, 1988 in which you requested our opinion as to whether Article 13 of the Canada-Germany Income Agreement (1981)(the "Treaty") will exempt the gain on the disposition of shares from tax in Canada in the situation described in the following paragraphs.
The company in question is incorporated in and is resident in Canada.
The company's common shares are held by a family of non-residents, all of whom reside in West Germany. Seventy percent of the shares are held by the parents and thirty percent by their three children.
Up until several months ago the company owned certain real estate in Montreal, Quebec. The company disposed of this real estate several months ago for a fair market value price and will be paying tax on the resulting gain (depreciation recapture and capital gain) for the fiscal year ended December 31, 1987. The company does not own any other immovable property.
The family now wishes to restructure the existing share holdings so that the parents will own a combined percentage of 49% of the common shares and the children will hold a combined total of 51%. To achieve this objective the parents will sell shares of the company to the children.
It is our view that as the company has paid tax in Canada on the immovable property it owned, the Department would take the position that the parents would not be subject to tax in Canada on the sale of their shares to their children pursuant to Article 13 of the Treaty. However, if a non-resident person structured a series of transactions where the-company avoided recognizing any gain for Canadian income tax purposes on the sale of the immovable property, the Department could take the position that the value of the shares is attributable principally from immovable property, even though that property had been disposed of by the company, and deny the exemption under Article 13 of the Treaty.
We trust this information will be of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch