3 April 2001 External T.I. 2000-0062815 - Foreign Tax Credit Kyrgyz

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 126(4) is applicable

Position: yes

Reasons: wording of provision

XXXXXXXXXX 2000-006281
D. Yuen
April 3, 2001

Dear XXXXXXXXXX:

Re: Canada-Kyrgyz Tax Agreement (the "Convention")

We are writing in response to your facsimile transmission to Brenda Vidal of the Saskatoon Tax Services Office dated December 15, 2000 wherein you requested a technical interpretation in respect of the Convention. Unless otherwise stated, all references to a statute herein are to the Income Tax Act (Canada), R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You have indicated that pursuant to XXXXXXXXXX contract (the "Contract") with the Kyrgyz Republic that state will only subject XXXXXXXXXX employees to personal tax if those individuals can claim a foreign tax credit under a treaty.

Your Questions

Article 23 of the Convention indicates that double taxation in Canada will be avoided by Canada granting a foreign tax credit for income tax paid to the Kyrgyz Republic, subject to the existing laws of Canada. Based on this, you are concerned that subsection 126(4), which would otherwise apply to deny the foreign tax credit otherwise available, may be overridden by the Convention. You have also asked for our comments on the time of the coming into force of the Convention in respect of employment income of Canadian residents employed in the Kyrgyz Republic.

Our Comments

1. Application of subsection 126(4)

As the Kyrgyz Republic will, under the Contract, only subject XXXXXXXXXX employees to personal tax if those individuals can claim a foreign tax credit, it is our view that subsection 126(4) will be applicable in the situation such that no foreign tax credit will be available for income taxes paid to the Kyrgyz Republic in respect of employment income earned by XXXXXXXXXX employees in connection with the Contract.

In this regard, it is our position that paragraph (1)(a) of Article 23 of the Convention does not override subsection 126(4) because the application of that paragraph of the Convention is subject to the existing laws of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada.

2. Coming into force

As indicated in the Finance Canada News Release dated January 9, 2001 the Convention entered into force on December 4, 2000 and its provisions will have effect in Canada as follows: in respect of withholding taxes, on amounts paid or credited to non-residents on or after February 1, 2001; and in respect of other taxes, for taxation years beginning on or after February 1, 2001. It is therefore our view that the provisions of the Convention will have effect for Canadian residents in respect of their employment income earned in the Kyrgyz Republic for their taxation years beginning on or after February 1, 2001 namely, in the calendar year 2002 and subsequent years. However, see above for the application of the Convention to employment income earned by Canadian residents in the Kyrgyz Republic in connection with the Contract.

These comments are provided in accordance with the guidelines set out in paragraph 22 of Information Circular IC 70-6R4 dated January 29, 2001 issued by the Canada Customs and Revenue Agency (CCRA) and are not considered binding on the CCRA.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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