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.
The Directorate noted 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 (so as to permit the Trust to have U.S.-source income in that year, as required under s. 126(1).)
Regarding whether the Trust could benefit from relief from double taxation pursuant to Art. XXIV(2)(a), it noted that Art. XXIV(2)(a) is expressly “subject to the provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada,” and stated:
[T]his means that a Canadian resident is subject to the limitations on claiming a foreign tax credit found in the Canadian legislation, and more specifically in section 126, including a timing restriction on when a foreign tax credit may be claimed (see … 2015-0601781E5 … .)
[W]here the election under Art. XIII(7) is not available … and the year of the Deemed Disposition … does not occur in the same year [as] … for U.S. income tax purposes … the Trust may not obtain a foreign tax credit in Canada for the U.S. taxes paid in a year subsequent to the year of the Deemed Disposition (assuming the Trust has insufficient income from other sources in the U.S. in the year the U.S. Property is considered by U.S. income tax laws to have been disposed) … .