13.2.2 [a] Article XIII(1) – Gains from Real Property
Article XIII(1) provides that the gains derived by a U.S. resident from the alienation of real property situated in Canada may be taxed in Canada. A
Conversely, where a Canadian resident disposes of real property situated in the U.S., the gain from the disposition of U.S. real property should be subject to tax both in Canada where the vendor is resident and in the U.S. where the property is situated.
13.2.2[b] Article XIII(2) – Gains from Personal Property in Permanent Establishment Context
Generally, Article XIII(2) provides that gains from the disposition of personal property forming part of the business property of a permanent establishment or a fixed base that a U.S. resident has or had in Canada are subject to tax in Canada.
13.2.2[c] Article XIII(3) – Definition of Real Property
Article XIII(3) defines the term “real property situated in the other Contracting State” for the purpose of Article XIII. The term “real property situated in Canada” means:
1 – Real property as referred to in Article VI (Income from Real Property) situated in Canada.
Article VI(2) provides that the meaning of the term “real property” is determined with reference to Canadian law. For the purposes of Article XIII, real property includes any option or similar right in respect of real property situated in Canada.
Real property also includes various interests in natural resources, such as the rights to explore for or to exploit natural resources and rights to amounts computed by reference to the amount or value of production from such resources, whether or not the payments in respect of such rights are variable or fixed.
2 – A share of corporation resident in Canada, where the value of the share is derived principally from real property situated in Canada. The shares of a corporation resident in any other State do not constitute real property, even if such shares derive their value principally from real property situated in Canada.
3 – An interest in a partnership, trust or estate, the value of which is derived principally from really property situated in Canada.
13.2.2[d] Article XIII(4) – Gains Exempt from Canadian Taxation
Gains from disposition of the following properties by a U.S. resident should be subject to Treaty relief under Article XIII(4) and be exempt from Canadian income tax:
1 – Shares in Canadian private corporations whose value does not principally derive from real property situated in Canada;
2 – Shares in corporations resident in the U.S. or any other State, even if such shares derive their value principally from real property situated in Canada;
3 – Any personal property, even if situated in Canada, provided that such property does not form a part of a permanent establishment of a U.S. resident in Canada.
13.2.2[e] Article XIII(5) – Gains Realized by Former Canadian residents
Article XIII(5) deals with the gains from the disposition of property recognized by individuals formerly resident in Canada.
When an individual resident in the U.S. disposes of property, the gain derived by the individual on the disposition of property owned by the individual at the time when she ceased to be resident in Canada, is subject to tax in Canada if the individual:
1 – Was a resident of Canada for 120 months during any period of 20 consecutive years prior to the disposition of property; and
2 – Was a resident of Canada at any time during the ten-year period immediately preceding the disposition of the property.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
The Accounting and Tax