13 September 1995 Internal T.I. 9518087 - GAINS IN U.S. TREATY & LIFE INSURANCE PROCEEDS

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 "gains" in Article XIII of Canada-U.S. Income Tax Convention means capital gains

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

-- wording used in the Convention
-- the need for Article VI(3)
-- wording used in the OECD Model Convention

		September 13, 1995

D. L. Moorhouse	Foreign Section
	Chief of Audit	S. Leung
	Regina Tax Services Office	957-2115

Attention: Donna Cheesman
Client Assistance Section

		951808

XXXXXXXXXX
Life Insurance Proceeds

We are writing in response to your facsimile of July 10, 1995 wherein you requested us to provide you with information for your reply to the enquiry from XXXXXXXXXX with respect to the above-noted subject matter.

XXXXXXXXXX referred you to the Kaplan Estate¹ case. As you may know, the Department does not follow the case either in the interpretation of the word "gains" or the way the gain was computed under paragraph 9 of Article XIII of the Canada-United States Income Tax Convention (the "Convention"). With respect to the latter issue, you may refer to Technical News No. 4, dated February 20, 1995, issued by the Department.

It is our view that where an income tax convention or agreement uses the word "gains", it is referring to capital gains; otherwise the term "income", "business profits" or some other specific type of income is generally referred to. If the word "gains" included income in addition to capital gains, the phrase "profits, income or gains" as used throughout the Convention (e.g. Article XIII(8), Article XXIV(2)(a), (3)(b), and (4)(a)) would not be so used for there is no need to repeat the word "income" in that phrase. Furthermore, if the word "gains" included also income in addition to capital gains, then gains derived from the alienation of real property as described in Article XIII(1) would include income from the alienation of real property (e.g. recapture of capital cost allowance) and there would not be any need for the specific provision of Article VI(3) of the Convention which states that the provisions of paragraph 1 (of Article VI) shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property. (Emphasis mine) In addition, the Convention was patterned on the OECD Model Convention and Article 13 of that convention clearly indicates that it is only applicable to capital gains.

It is not clear why in paragraph 9 of Article XIII of the Convention the words "capital asset" are used instead of "property" which is used throughout the Article. However, we do not feel that the change in words by itself is sufficient to cause us to interpret the word "gains" as used in the other paragraphs of Article XIII of the Convention to include income or profits in addition to capital gains.

With respect to XXXXXXXXXX argument that the specific rules in Article VII and Article V of the Convention dealing with permanent establishment would overcome the problem of subjecting any gain, whether on income or capital account, to the provisions of Article XIII of the Convention, we submit that this would not be the case because by virtue of paragraph 6 of Article VII of the Convention, Article XIII of the Convention would take precedent over Article VII.

XXXXXXXXXX pointed out by citing the Gladden Estate² case that a tax treaty must be given a liberal interpretation with a view to implementing the true intentions of the parties. In our view the above arguments demonstrate relatively clearly that Article XIII of the Convention was intended to apply only to capital gains. Therefore, the principle established in the Gladden Estate case is in support of the Department's position.

In summary, we maintain that the word "gains" used in Article XIII of the Convention means capital gains only and since the amount required to be included in computing a non-resident's taxable income earned in Canada under subparagraph 115(1)(a)(vi) of the Act is not a capital gain for the purposes of the Convention, it is not exempt from taxation in Canada under paragraph 4 of Article XIII of the Convention. As the amount is an item of income which arises in Canada but is not dealt with in Articles VI to XXI of the Convention, such amount is taxed in accordance with the Act.

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

ENDNOTES

¹ Estate of the Late Isaac Kaplan v. Her Majesty the Queen, 94 DTC 1816 (TCC)

² Gladden Estate v. The Queen, 85 DTC 5188 (FCTD)