12 February 1985 Income Tax Severed Letter A-0694

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.

Dear XXX:

This is in reply to your letter of October 29, 1984 concerning the income tax consequences of paragraph 212(1)(d) and subsection 212(13) of the Income Tax Act (the "Act") and Articles III(1)(h), VIII(1) and (2)(a) and XII(2), (4) and (6)(b) of the 1980 Canada-U.S. Income Tax Convention (the "Treaty") in the circumstances described.

A U.S. corporation carrying on business in Canada leases an aircraft from a U.S. lessor. The aircraft is used to transport executives from various locations in Canada to various locations in the U.S., between various Canadian cities and between various U.S. cities.

It is your view that

• (a) the provisions of paragraphs 212(1)(d) and 212(13)(a) of the Act apply with respect to the portion of the aircraft lease payments, made by the U.S. lessee to a U.S. lessor, applicable to the use of the aircraft in Canada (i.e. that portion of the rental payments applicable to the use of the aircraft outside Canada is not subject to Part XIII);
• (b) the provisions of Articles VIII(1) and (2) exempt from tax in Canada the portion of the rental payments applicable to the use of the aircraft in international traffic', as that term is defined in Article III of the Treaty; and
• (c) the rate of tax that may be imposed, in these circumstances, pursuant to Part XIII of the Act is limited to ten per cent, in accordance with Article XII(2) of the Treaty.

We are in agreement with your views expressed above. We do not, however, agree with your suggestion that training and maintenance flights should be prorata allocated between domestic and international flights for the purpose of applying the Treaty provisions. In our view, while the record for such flights must be recorded on the basis of time actually used in Canada for purposes of Part XIII, such flights would not constitute international traffic for the purposes of the Treaty.

In addition, we note that, as set out in paragraph 5 of IT-494, the apportionment in (a) above is based on time in Canada, whereas the exemption referred to in (b) above is based on use. It is apparent that the exemption referred to in (b) above is only relevant where the exempt portion of the rentals (referred to in (b) above) exceeds the non-taxable portion of the rentals, determined in accordance with subparagraphs 212(1)(d)(ix) of the Act. Thus, for example, if the rental payment for the month is determined to be 75% taxable pursuant to paragraph 212(1)(d) of the Act and if the percentage of total use in the month that does not constitute international traffic is 60%, the tax payable in respect of that payment would be reduced to 10% of 60% of the amount thereof, by virtue of the treaty provisions referred to previously.

We trust these comments will be of assistance.