26 May 2000 Internal T.I. 1999-0009037 - Income Capital Gain Ireland Article VI

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the word "income" in paragraph 1 of Article VI of the Canada-Ireland Income Tax Agreement (Treaty) should be interpreted to include "capital gains" or "taxable capital gains".

Position: Although the word "income" is not defined in the Treaty or the Act, the word "income" in paragraph 1 of Article VI of the Treaty includes capital gains on dispositions of capital properties. However, the word "income" does not mean the taxable capital gain amount of such dispositions.

Reasons: The word "income" in income tax treaties generally includes capital gains in respect of dispositions of capital property. This position is consistent with our views on the meaning of the words "income" and "gains" found in other treaties such as the Canada-Australia Treaty and the Canada-U.K. Treaty. This position is also consistent with Article 13 of the OECD Model and Commentary which specifically deals with capital gains on dispositions of capital properties. This view is fair, consistent and reasonable and it is in line with the spirit and intent of the 15% tax limitation set out in paragraph 1 of Article VI of the Treaty.

		May 26, 2000

	Toronto North Tax Services Office	International Section
	11th Floor, Appeals Section	G. Middleton
	5001 Yonge Street 	(613) 957-2122
	North York ON  M2N 6R9

	Attention: Anne Morris-Dadson
	               Section 430-40
		1999-000903

Article VI of the Canada-Ireland Income Tax Agreement

This is further to our telephone conversations (Middleton/Morris-Dadson) concerning a resident of Ireland who disposed of shares in a Canadian company which constitutes "taxable Canadian property" ("TCP") under the Income Tax Act (the "Act"). As a result of the disposition, the person realized a capital gain and a taxable capital gain that was required to be included in the non-resident person's taxable income earned in Canada under subsection 115(1) of the Act.

The main issue is whether the provisions of paragraph 1 of Article VI of the Canada-Ireland Income Tax Agreement (the "Ireland Treaty") apply to the person's capital gain and, if so, whether the 15% tax rate limitation referred to therein applies to the amount of the person's capital gain or to the amount of the person's taxable capital gain in respect of the disposition of such property.

In our view, paragraph 1 of Article VI of the Ireland Treaty applies to the person's gain on the disposition of the TCP and that the 15% tax rate limitation referred to therein applies to the amount of the person's capital gain on such disposition. (The 15% limitation does not apply to the amount of the taxable capital gain on such disposition.) The reasons and rationale to support our views are summarized below.

Paragraph 1 of Article VI of the Ireland Treaty reads:

"The rate of Canadian tax on income (other than income from carrying on business in Canada or from performing duties in Canada) derived from sources within Canada by a resident of Ireland shall not exceed 15 per cent."

The word "income" is not defined in the Ireland Treaty or in the Act and Canada did not levy income tax on capital gains at the time the Ireland Treaty entered into force. Furthermore, there is no provision in the Ireland Treaty which specifically deals with capital gains. Therefore, it is arguable that the word "income" does not include capital gains on dispositions of capital properties. However, it is our position that, for the purposes of paragraph 1 of Article VI of the Ireland Treaty, the word "income" includes gains derived from dispositions of capital properties and thus, includes capital gains on such dispositions.

It is also our position that, in Canada's other conventions, the word "income" includes "capital gains". For example, we have taken the position that the phrase "items of income" found in paragraph 1 of Article 21 of the Canada-Australia Income Tax Convention includes capital gains and that the word "income" in paragraph 2 of Article 27 of the Canada-United Kingdom Income Tax Convention includes "capital gains". The Department of Finance is aware of, and is in agreement with, these positions."

It should be noted that the determination of a taxable capital gain amount in Canada is merely a process under which Canada determines how much of a capital gain is subject to tax. In this regard consider the following. Article 13 of the OECD Model Income Tax Convention (the "OECD Model") deals with the taxation of capital gains. As indicated paragraphs 1 to 3 under the "Preliminary remarks" in the OECD Commentary (the "Commentary") for Article 13 of the OECD Model, the taxation of capital gains varies considerably from country to country and it is left to the domestic law of each Contracting State (CS) to decide whether capital gains should be taxed and, if they are taxable, how they are taxed. (In the case of Canada, the main provisions for the taxation of capital gains is found in Subdivision "c" of Part I of the Act.) As stated in paragraph 12 of Article 13 of the OECD Commentary,

"The Article does not specify how to compute a capital gain, this being left to the domestic law applicable. As a rule, capital gains are calculated by deducting the cost from the selling price."

As indicated in this OECD Commentary, the general understanding among CSs is that Article 13 of the OECD Model refers to capital gains and the computations for capital gains is left to the domestic law of each CS. (In the case of Canada, "capital gain" is defined in subsection 248(1) of the Act and has the meaning assigned by section 39 of the Act.) In connection with this, it is our understanding that, in many CSs such as the United States, the taxation is based on the gross capital gains.

If the word "income" in paragraph 1 of Article VI of the Ireland Treaty is interpreted to mean "taxable capital gains", this would be inconsistent with the meaning of gains on dispositions of capital properties in Canada's other conventions.

It should also be noted that the phrase "taxable capital gain" does not appear in any of the Articles in Canada's income tax conventions, the OECD Model or the OECD Commentary. The phrase "net taxable capital gains" does appear in paragraph 16 of the Protocol to the Canada-Brazil Income Tax Convention; however, that paragraph was specifically inserted to deal with the taxation under Part I of the Act of a Canadian resident on the foreign accrual property income of a controlled foreign affiliate of such Canadian resident. That paragraph did not deal with the disposition of property of a non-resident and there was specific wording for the special taxing provision.

In summary, the word "income" found in paragraph 1 of Article VI of the Ireland Treaty includes "capital gains" and the Canadian tax payable by a resident of Ireland in respect of the disposition of the shares described above is limited to 15% of the person's capital gain on such disposition.

With respect to our reply memorandum dated July 24, 1996 written to G. Troy of the North York Tax Services Office (file # 962478) concerning the same issue, such response will be amended to reflect our position described above.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. 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 LAD 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 (613)994-2898. A copy will be sent to you for delivery to the client.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. International Tax Services Office
5th Floor, 2204 Walkley Road
Ottawa ON K1A 1A8
Attention: Janina A Nickus
Client Services