Société générale valeurs mobilières – Federal Court of Appeal finds that a Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income

Did a tax sparing provision in the Canada-Brazil Treaty, which deemed a Canadian taxpayer to have paid 20% Brazilian withholding tax on interest received by it from Brazil, have the effect of providing to it a Canadian foreign tax credit equal to the amount of that fictional tax, even though its effective Canadian tax rate on that interest income was much lower than 20% (perhaps because of applicable leverage)? This question turned on the meaning of a proviso in the Treaty, which stated that the FTC otherwise required by the Treaty to be accorded by Canada:

shall not… exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.

Paris J, in rejecting the taxpayer’s position (and affirming the Crown's position that the FTC effectively should be limited to the low effective Canadian tax rate on the Brazilian interest income), had stated:

…The proper test for determining which amounts of the Canadian resident taxpayer should be included or deducted from the gross interest arising from sources in Brazil is that found in subsection 4(1) of the Income Tax Act.

This was confirmed by Woods JA, who stated:

[T]he ordinary meaning of the text takes into account not only the gross income which may be taxed by Brazil, but also the actual Canadian tax as computed under the Income Tax Act, which is based on net income.

Neal Armstrong. Summary of Société Générale Valeurs Mobilières Inc. v. The Queen, 2017 FCA 3 under Treaties - Article 24.