Issue
Does Australia have a taxing right under Schedule 3 the International Tax Agreements Act 1953 (the Canadian Convention) over a gain made by an Australian resident taxpayer from the surrender of a life interest in a Canadian deceased trust estate?
Decision
Yes. Australia has a taxing right under the Canadian Convention over a gain made by an Australian resident taxpayer from the surrender of a life interest in a Canadian deceased trust estate.
Facts
The taxpayer is an Australian resident for income tax purposes.
The taxpayer holds a life interest in a stream of income granted by a testamentary trust which arose from a will.
The income stream from the life interest is derived from a Canadian deceased trust estate.
The taxpayer did not pay anything for the life interest.
The taxpayer has been approached by a charity that was named as a beneficiary to surrender their life interest in exchange for a life annuity from the charity.
Reasons for Decision
Article 13 of the Canadian Convention deals with gains made by an Australian resident from the alienation of specific types of property.
Article 13(5) of the Canadian Convention provides that nothing in the Canadian Convention shall affect the application of both Australian and Canadian law relating to the taxation of gains of a capital nature derived from the alienation of any property, other than that to which any of the preceding paragraphs of this Article apply.
As paragraphs (1) to (4) of Article 13 are not applicable to the alienation of interests in an estate, Article 13(5) applies. Accordingly, the capital gain received from the alienation of the life interest will be taxable under both Australian and Canadian law. Note: Where Australia taxes this gain, Article 23(1) of the Canadian Convention provides that, subject to provisions of the law of Australia, a credit for tax paid in Canada under the law of Canada, and in accordance with the Canadian Convention, will be allowed against Australian tax paid on income from Canadian sources.