1 October 1984 Income Tax Severed Letter A-0524 - [Canada-U.S. Tax Convention, 1980 Article XXX, Paragraph 5 ]

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.

October 1, 1984

Director General Non-Corporate Rulings Department of National Revenue 875 Heron Road Ottawa, Ontario K1A 0L8

Dear Sir:

Re: Canada-U.S. Tax Convention, 1980 Article XXX, Paragraph 5

We hereby request your opinion on the application of the transitional provisions of the Canada-U.S. Tax Convention, 1980.

Our questions relate to the payment of royalties on Canadian resource properties to residents of the United States. Under the 1942 Convention, the Canadian tax on royalties is limited to 15%. Since royalties on resource properties are not included in the 1980 Convention's definition of royalties, the 25% tax rate under Section 212 of the Income Tax Act will apply once the relevant articles of the 1980 Convention come into force.

Paragraph 5 of Article XXX indicates that the provisions of the 1942 Convention continue to apply to the end of the recipient's first taxation year beginning after 1984. In the case of royalties and other sources of income where tax is withheld at source, the payor rather than the recipient is responsible for the tax payment. As a result, the payor must determine the status and taxation year of the recipient. If in error, the payor appears to be responsible for insufficient withholdings.

If the royalty payor obtains a statement from the royalty recipient as to the U.S. recipient's fiscal year-end, can he rely on that statement to avoid penalties for failure to withhold sufficient tax?

Paragraph 5 of Article XXX indicates the 1942 Convention continues to apply to the end of the recipient's first taxation year commencing after 1984. The provision generally appears to delay these provisions of the Treaty until January 1, 1986 or later, in respect of withholding taxes on royalties on Canadian resource properties. Please confirm that the provisions of the 1942 Convention will continue to apply as outlined in the following cases:

- A corporation resident in the United States that has a December 31 year-end owns a royalty on a Canadian resource property. Effective June 30, 1985, it changes its year-end to June 30. The 15% tax rate under the 1942 Convention applies to royalty payments to June 30, 1985.

- An individual resident in the United States owns a Canadian resource property that he acquired before 1985. In 1985, the individual acquires another royalty on a Canadian resource property. His taxation year is the calendar year, and he will be eligible for 15% withholdings for all Canadian resource property royalty payments in 1985.

- An individual resident in the United States who never owned property in Canada or otherwise applied the provisions of the 1942 Convention before 1985 acquires a royalty on a Canadian resource property in 1985. His taxation year is the calendar year, and he will be eligible for 15% withholding for Canadian resource property royalty payments in 1985.

- On June 30, 1985, an individual resident in the United States dies. The individual owned a royalty on a Canadian resource property which, upon his death, was transferred to his estate. His estate has its first year-end on December 31, 1985. The estate will be eligible for 15% withholding on Canadian resource property royalty payments until December 31, 1985.

- A company incorporated and resident in the United States incorporated on June 30, 1985 acquires a royalty on a Canadian resource property in 1985. The Company's first taxation year ends June 30, 1986 and it will be eligible for 15% withholding for Canadian resource property royalty payments until June 30, 1986.

If you have any questions or require clarification of the above queries, please contact the writer at XXXX.

Yours very truly

XXXX