A Canadian-resident trust (the “Trust”) will realize a capital gain on a deemed disposition (the “Deemed Disposition”) pursuant to s. 104(4)(b) of the “U.S. Real Property” on its 21st anniversary date. Is the Trust eligible to make an election pursuant to Art. XIII(7) the Canada-U.S. Treaty to elect for U.S. federal income tax purposes, a notional sale and repurchase of the U.S. Real Property to occur in the same year as that of the Deemed Disposition?
The Directorate noted that, in the absence of the election, there could be “unrelieved double taxation” since a disposition in a different year for U.S. purposes could result in insufficient income from U.S. sources for purposes of the s. 126(1) credit in the year of the Deemed Disposition. It then indicated that it considered that it was within the IRS’s jurisdiction and not its jurisdiction to determine whether the trust is eligible to elect pursuant to Art. XIII(7) the Canada-U.S. Treaty to have a notional sale and repurchase of the U.S. real property occur for U.S. purposes in the same year as that of the Deemed Disposition.