18 July 1990 Income Tax Severed Letter AC74615 - Disposition by U.S. Resident of Shares of Canadian Corporation

G.C. Hoard                         John Chan
Chief of Audit                     Resource Industries Section
Calgary District Office            (613) 952-9019

Ron Schey
Tax Avoidance Section
                                   7-4615

Subject: 24(1)

We are writing in reply to your memorandum dated December 18, 1989 wherein you requested our comments in relation to certain transaction described herein.

FACTS

The transactions which have occurred during

1.

2.

3.                      24(1)

4.

5.

6.

PROBLEM

                        24(1)

Generally, capital gains, if any, on dispositions by a non-resident of Canada of shares of a corporation resident in Canada (other than a public corporation) would be taxable in Canada by virtue of subparagraphs 115(1)(b)(iii) and (iv) of the Act.

                         24(1)

Under Article XIII(1) of the 1980 Canada - U.S. Income Tax Convention (the "Convention")

         "Gains derived by a resident of a Contracting State from
the alienation of real property situated in the other Contracting
State may be taxed in that other State."

Article XIII(3)(b) states that for the purposes of Article XIII, the term "real property situated in the other Contracting State" in the case of real property situated in Canada means:

         "(i) Real property referred to in Article VI (Income
              from Real Property) situated in Canada.

         (ii) A share of the capital stock of a company, the
              value of whose shares is derived principally
              from real property situated in Canada."

Article VI of the Convention states

         "For the purposes of this Convention, the term "real
property" shall have the meaning which it has under the taxation
laws of the Contracting State in which the property in question
is situated and shall include any option or similar right in
respect thereof.  The term shall in any case include usufruct of
real property, rights to explore for or to exploit mineral
deposits, sources and other natural resources and rights to
amounts computed by reference to the amount or value of
production from such resources; ships and aircraft shall not be
regarded as real property."

Thus it would be prudent for the Calgary District Office to determine 24(1) In doing so, Article XIII(9) ("the fresh start rule") may be relevant. As explained at paragraph 12, IT-173R2 , the fresh start rule is a transitional rule which reflects the fact that under Article VIII of the 1942 Canada - U.S. Income Tax Convention (the "1942 Convention"), gains derived by U.S. residents from the sale or exchange of capital assets located in Canada were exempt from tax in Canada provided that the U.S. resident did not have a permanent establishment in Canada at any time in the taxation year during which the sale or exchange occurred. The fresh start rule operates to exempt from tax in Canada the portion, if any, of a capital gain that had accrued during a period ending on December 31, 1984, provided that the non-resident meets the conditions specified in paragraph 9 of Article XIII of the Convention.

                        24(1)

OTHER

C. During our numerous telephone conversations (Shey/Chan), you asked us to review our files for a record of discussions between the Rulings Directorate and 24(1) in relation to the aforesaid transactions and corporations.

         We have reviewed our files as requested and have not
found any record discussions with  24(1).   We have enquired of
the individuals who were principals on the  24(1) file in a
ruling capacity during 1985 and 1986 regarding consultations or
discussions with  24(1) with respect to  24(1) transactions.
These individuals have indicated that to their knowledge, there
were no discussions nor consultations by the Rulings Directorate
with 24(1) concerning the  24(1)

Chief Resource Industries Section Bilingual Services and Resource Industries Division Rulings Directorate