1 October 2003 External T.I. 2003-0012415 - Canada-Luxembourg Treaty Art - 13 & 28

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether capital gains realized by a corporation incorporated in Luxembourg that is a holding company covered by the law of 31 July 1929 are subject to article 13 of the Canada - Luxembourg Tax Convention.

Position:

No.

Reasons:

Wording of the Convention.

XXXXXXXXXX 2003-001241
Fouad Daaboul
October 1st, 2003

Dear XXXXXXXXXX:

Re: The Canada-Luxembourg Tax Convention

This is in reply to your letter of March 20, 2003, wherein you requested our comments on the above-mentioned subject. The situation involves a corporation incorporated in Luxembourg and in respect of which the Tax Authorities of Luxembourg have issued a certificate of residence in which it is stated that the corporation is a resident of Luxembourg within the meaning of the Luxembourgish Tax Law, and is a holding company covered by the law of July 31, 1929 that benefits from a specific exemption from corporate income tax.

Question

If the corporation realized capital gain from the disposition of shares of a Canadian corporation, the value of which was not derived principally from immovable property, could the corporation rely upon paragraph 4(a) of article 13 of the Canada-Luxembourg Tax Convention (the " Convention ") to exempt the capital gain so realized from taxation in Canada?

Our comments

It appears that the situation you describe concerns a completed or proposed transaction and therefore, we are unable to provide any confirmation of the tax consequences except, with respect to a proposed transaction, in the context of an advance income tax ruling. Confirmation of the tax consequences respecting a completed transaction must be obtained from the local tax services office. We can offer, however, the following general comments.

Under the Income Tax Act (the "Act"), a non-resident person is required to include in computing the taxable income earned in Canada by the non-resident under paragraph 2(3)(c) and subparagraph 115(1)(a)(iii) of the Act, taxable capital gains derived from the disposition of Canadian equities that are "taxable Canadian properties" as defined in subsection 248(1) of the Act, unless relief is provided under the tax treaty, if any, between Canada and the country of residence of the non-resident person.

Section 6.3 of the Income Tax Conventions Interpretation Act states:

Except where a convention expressly otherwise provides, any amount of income, gain or loss in respect of the disposition of a property that is taxable Canadian property within the meaning assigned by the Income Tax Act is deemed to arise in Canada.

Article 28 of the Convention states in part :

3. The Convention shall not apply to holding companies within the meaning of the special Luxembourg laws (currently the Act of July 31, 1929 and the Grand Duchy Order of December 17, 1938) or any other similar law enacted in Luxembourg after the signature of the Convention, nor to companies subjected to similar fiscal laws in Luxembourg...

Since the corporation is a holding company covered by the Luxembourg law of July 31, 1929, it is subject to the exception set out in paragraph 3 of article 28 of the Convention such that any other part of the Convention would generally not apply to the corporation. Assuming that the corporation is a resident of Luxembourg for Canadian tax purposes, and that its shares in a Canadian corporation that are disposed of are "taxable Canadian properties", the taxable portion of the capital gain from the disposition of such shares would be required to be included in computing the taxable income earned in Canada by the corporation.

We trust the above comments are of assistance.

Yours truly,

Alain Godin
for Director
International and trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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