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.
HAA 4093-D1 XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
Re: Canada-Denmark Income Tax Agreement (the "Agreement")
Treatment of Capital Gains
This is in reply to your letter to the International Tax Programs Directorate regarding the above matter. We have been asked by that Directorate to respond on their behalf. We apologize for the delay in responding.
The hypothetical situation you have asked us to address is as follows:
• A corporation incorporated in Denmark and resident in Denmark for purposes of the Agreement owns all of the shares of a corporation resident in Canada (not a public corporation).
• It wishes to transfer its shares of the Canadian company to a related Danish corporation. The transaction will not be subject to tax in Denmark.
• The shares of the Canadian company do not derive their value primarily from real property in Canada. The transferor does not carry on business in Canada.
• By virtue of subsection 2(3) and section 115 of the Income Tax Act, this transfer would result in a capital gain of the transferor unless an exemption is available under the Agreement.
Analysis and Discussion
The Agreement does not specifically deal with the taxation of capital gains. Paragraph 1 of Article III of the Agreement states that the profits of a Danish enterprise shall not be subject to Canadian tax unless the enterprise is engaged in trade or business in Canada through a permanent establishment situated therein. The opening words of paragraph 1 of Article III of the Agreement are not unlike the opening words of Article 7 (Business Profits) in both the 1963 OECD Model and the 1977 OECD Model. As well, Article III of the Agreement uses the phrase "engaged in trade or business" while the 1963 and 1977 OECD Models use the phrase "carries on business". These are very similar and clearly give the connotation of "business profits".
It is our view that the phrase "profits of a Danish enterprise" does not include capital gains and that capital gains are simply not covered under the Agreement. The above gain would be subject to tax under Canada's domestic tax law with no relief provided by the Agreement.
We hope our comments are of assistance.
Yours truly
for DirectorReorganizations and Foreign DivisionIncome Tax Rulings and Interpretations DirectoratePolicy and Legislation Branch
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