XXX
A.A. Cameron (613) 995-1787
Attention: XXXX
January 27, 1986
Dear Sirs:
Re: Subsections 48(1) and 250(5) of the Income Tax Act (the "Act")
We are writing in response to your letter of November 28, 1985 in which you request our opinion on the application of the above-mentioned provisions of the Act to a hypothetical situation which may be summarized as follows:
- USCo is the U.S. subsidiary of Canco, a Canadian company. USCo, in turn, has several U.S. operating subsidiaries.
- USCo is a U.S. incorporated company and it is considered to be a U.S. resident for U.S. domestic income tax purposes.
- Since USCo's directors are Canadian residents and they exercise immediate, direct and detailed control over the activities of the company, its mind and management are considered to be in Canada. Therefore, for purposes of the Act, USCo is considered to be a Canadian resident.
- USCo has a fiscal year end of December 31 and was subject to the Canada-U.S. Income Tax Convention (1980) (the "Convention") for its fiscal year commencing January 1, 1985.
- Due to the operation of paragraph 3 of Article IV of the Convention, USCo is deemed to be a resident of the U.S. for the purposes of the Convention.
In our opinion, based upon the above factors USCo is a corporation to which subsection 250(5) of the Act would apply. We would agree that for the purpose of computing its income, taxable income earned in Canada and tax payable under Parts I and XIV of the Act the provisions of that subsection would apply for USCo's taxation year commencing January 1, 1986. Therefore, as of January 1, 1986 USCo will not be considered a resident of Canada for the purposes of either the Convention or the Act.
Subsection 48(1) of the Act relates only to capital property of a taxpayer as it applies for the purposes only of subdivision c of the Act which concerns taxable capital gains and allowable capital losses. A deemed disposition of assets which did not represent capital property to the taxpayer would therefore not occur under the provisions of that subsection.
In our opinion USCo would have ceased to be resident in Canada as of January 1, 1986 which is the earliest time it was deemed by subsection 250(5) of the Act to be not resident in Canada. Therefore provisions of subsection 48(1) of the Act would deem it to have disposed of certain capital properties at the end of its 1985 taxation year. However, since a deemed disposition under section 48 of the Act is considered to be an alienation of property for the purposes of the Convention, paragraph 4 of Article XIII of the Convention would exempt USCo from taxation in Canada on any gain arising on this deemed disposition other than gains on the alienation of either real property situated in Canada or personal property forming part of the business property of a permanent establishment in Canada (as detailed in paragraphs 1 through 3 of Article XIII of the Convention).
We hope these comments are of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch