21 September 2006 Internal T.I. 2006-0201651I7 - Disposition of Taxable Canadian Property ("TCP")

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In the situation where paragraph 44(2)(b) of the Act applies to a non-resident taxpayer disposing of TCP by way of expropriation by a government body, does:

(1) subsection 116(3) of the Act apply to the non-resident at the time the government body makes an initial payment of compensation; and
(2) subsection 116(5) of the Act apply to the government body at the time it makes an initial payment of compensation to the non-resident.

Position:	(1) No. 	(2) Yes.

Reasons: (1) Paragraph 44(2)(b) of the Act overrides the application of subsection 116(3) of the Act. (2) Paragraph 44(2)(b) does not override the application of subsection 116(5) of the Act.

 									September 21, 2006

	Lata Agarwal						HEADQUARTERS
	International & Large Business Directorate	A. Seidel, CMA
	Compliance Programs Branch				(613) 957-2058

									2006-020165

Disposition of Taxable Canadian Property

We are writing in response to your August 4, 2006 e-mail in which you requested our comments concerning the application of subsections 116(3) and (5) of the Income Tax Act (the "Act) in the situation where a property has been expropriated from a non-resident taxpayer and the amount of compensation for such property has not been finalized.

Background

1. A non-resident taxpayer (the "Non-Resident") owns a taxable Canadian property ("TCP") that is not a property described in subsection 116(5.2) of the Act or "excluded property", as defined in subsection 116(6) of the Act. A municipal government (the "Government") has expropriated the TCP and has paid an amount to the Non-Resident as compensation for such TCP.

2. The Non-Resident does not agree with the Government's valuation of the TCP. The Non-Resident has initiated court proceedings to have the courts determine the appropriate compensation that the Non-Resident is entitled to receive for the expropriated TCP.

3. The matter is still before the courts at the time that the Government pays the initial compensation to the Non-Resident.

Issues

#1. Does subsection 116(3) of the Act apply to the Non-Resident at the time that the Government makes the initial compensation payment to the Non-Resident?

#2. Does subsection 116(5) of the Act apply to the Government at the time that the Government makes the initial compensation payment to the Non-Resident?

Our Comments

Issue #1

Subsection 248(1) of the Act provides that a "disposition" occurs when, among other things, there is "any transaction or event entitling a taxpayer to proceeds of disposition of the property". Section 54 of the Act provides that "proceeds of disposition" includes, among other things, "compensation for property injuriously affected under statutory authority", which includes compensation for property expropriated from a taxpayer.

Subsection 116(3) of the Act requires a non-resident person to send a notice to the Minister not later than 10 days after a disposition of TCP in a taxation year. The notice must include the details enumerated in subsection 116(3) of the Act.

Subsection 44(2) of the Act provides that, for the purposes of the Act, the time at which a taxpayer has disposed of expropriated property for which there are proceeds of disposition and the time at which an amount, in respect of those proceeds of disposition has become receivable by the taxpayer, is deemed to be the earliest of the times enumerated therein. Assuming that none of the other paragraphs of subsection 44(2) of the Act apply, pursuant to paragraph 44(2)(b) of the Act, "where a claim, suit, appeal or other proceeding has been taken before one or more tribunals or courts of competent jurisdiction", the time of the disposition and the time at which any proceeds of disposition has become receivable by the taxpayer, is deemed to be the day on which the taxpayer's compensation for the property is finally determined by such tribunals or courts. Furthermore, subsection 44(2) of the Act deems a taxpayer to continuously own the property until the time the dispute is resolved.

Provided that none of the other paragraphs of subsection 44(2) of the Act apply, it is our view that, by virtue of subsection 44(2) of the Act, subsection 116(3) of the Act would not apply to the Non-Resident where the Non-Resident has filed a claim, suit, appeal or other proceeding against the Government in respect of the compensation received for the expropriated TCP so long as such claim, suit, appeal or other proceeding against the Government remains outstanding.

Issue #2

Subsection 116(5) of the Act requires a purchaser that has acquired taxable Canadian property from a non-resident to pay and remit, as tax for the year on behalf of the non-resident person, 25% of the amount determined under that subsection.

"Purchaser" and "acquired" are not defined in the Act. Black's Law Dictionary defines "purchaser" as "one who obtains property for money or other valuable consideration". Therefore, where the Government expropriates a property and provides monetary compensation to the "vendor", the Government would be a "purchaser" for the purposes of subsection 116(5) of the Act. Black's Law Dictionary defines "acquire" as "to gain possession or control of; to get or obtain". Black's Law Dictionary also defines "possession" as "the right under which one may exercise control over something to the exclusion of all others". Whether or not the Government has acquired the TCP from the Non-Resident would be a question of fact based upon all of the facts and agreements. Nevertheless, it is our view that in this expropriation situation, the Government would have acquired the TCP when it took legal title to, and beneficial ownership of, the TCP. The fact that the Non-Resident and the Government do not agree on the actual amount of compensation that is adequate to compensate for the expropriation of the TCP would not be sufficient to conclude that the Government has not acquired the property. Accordingly, subsection 116(5) of the Act would apply to the Government at the time that the initial compensation is paid to the Non-Resident. If it is subsequently determined that the Government must provide the Non-Resident with additional compensation, such additional compensation would be subject to the application of subsection 116(5) of the Act at the time that such additional compensation is paid to the Non-Resident.

Conclusion

Where the provisions of paragraph 44(2)(b) of the Act are applicable to an expropriation of TCP, subsection 116(3) of the Act will not apply to the non-resident "disposing" of the TCP until the taxpayer's compensation for the TCP is finally determined. The fact that the non-resident has already received partial compensation for such expropriation is not relevant in determining whether subsection 44(2) of the Act overrides the application of subsection 116(3) of the Act.

Notwithstanding the fact that subsection 116(3) of the Act may not apply to the non-resident at the time of the expropriation, by virtue of the application of subsection 44(2) of the Act, subsection 116(5) of the Act will nevertheless apply to any government body at that time to require withholding from any compensation that is paid to the non-resident for expropriated property.

We hope that our comments are of assistance. If you wish to discuss any of the above, please contact the writer.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch