INTERNATIONAL ACCOUNTING LAW ASSISTANCE

Tom Roberge
952-5848
1-800-823-4448

 http://www.fin.gc.ca/news97/97-031e.html

The Canada-U.S. tax treaty provides that Canada can tax capital gains realized by a resident of the U.S. on the shares of (or an interest in) any corporation, trust or partnership whose value is mostly made up of Canadian real estate. Similarly, the United States can tax gains realized by a resident of Canada on what is known in U.S. law as a "United States real property interest."

The definition of "United States real property interest" currently includes some Canadian partnerships and trusts that hold U.S. property, but does not include shares of any non-U.S. corporations. Canadian law currently taxes non-residents' gains on some non-Canadian partnerships, but not on non-resident trusts or corporations.

In 1995, Canada proposed to amend the Income Tax Act to tax non-residents' gains on shares of non-resident corporations, and interests in non-resident trusts, where most of the value of the shares or interests is attributable to Canadian real estate or resource property. Except where a tax treaty precludes such tax, the new rule would apply to gains that accrued (measured proportionally) after April 26, 1995.

The change announced today will limit the application of this proposed Canadian tax change in the case of United States residents. Canada will agree not to tax U.S. residents' gains on shares of corporations that are not resident in Canada. Similarly, the United States will agree that "United States real property interests" will not include shares of corporations that are not resident in the U.S. The change applies as of April 26, 1995.

The change means that Canadians who invest in U.S. real estate through Canadian companies will continue to pay Canadian tax, rather than any possible future U.S. tax, when they sell their shares. And U.S. investors in U.S. companies that hold property in Canada will still pay U.S. tax when they sell their shares, rather than Canadian tax.