14 February 2006 Internal T.I. 2004-0096641I7 - Representative of a Member State to the ICAO

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.

Principal Issues: Whether Article 34 of the Vienna Convention on Diplomatic Relations (VCRD) exempts a diplomatic agent from tax on the gain resulting from the disposition of his or her residence?

Position: No.

Reasons: Paragraph (d) of Article 34 of the VCDR.

								February 14, 2006

XXXXXXXXXX  Tax Services Office			Pascal Tétrault
XXXXXXXXXX 							(613) 946-3553

Attention: XXXXXXXXXX
								2004-009664

Representative of a Member State to the ICAO

We are writing in response to your email of September 28, 2004 requesting our views on the taxation of a representative of a member State to the International Civil Aviation Organization (the ICAO). XXXXXXXXXX During this period, XXXXXXXXXX acquired a residence, which was later disposed of at the end of the accreditation period.

You are essentially concerned with the principles mentioned in technical letter 2003-003415 dated October 27, 2003 on the taxation of a residence. Your first query deals with the interpretation of Article 34 of the Vienna Convention on Diplomatic Relations (the VCDR) and you are seeking our views regarding the merits of submissions made on behalf of XXXXXXXXXX. Your second query concerns the capital gain calculation in paragraph 40(2)(b) of the Income Tax Act (the Act) and more particularly if the letter "B" of the formula can correspond to the number one in the presence of a non-resident.

Submissions

In a letter dated September 16, 2004, XXXXXXXXXX representative, XXXXXXXXXX, made submissions that capital gains resulting from the disposition of XXXXXXXXXX own residence is exempt from tax because of the effect of the preamble to Article 34 of the VCDR (reproduced below). According to the representative, neither paragraph (b) nor (d) of Article 34 are applicable in this case. First, the expression "dues and taxes on private immovable property" in paragraph (b) deals with dues and taxes related to holding property such as duties on the transfer of immovables and immovable property taxes and does not deal with capital gains taxes resulting from the disposition of property. Regarding paragraph (b), XXXXXXXXXX representative conceded that the residence was not held on behalf of the sending State for the purposes of the mission. Second, Canada has under paragraph (d) of Article 34 the right to levy dues and taxes on private income having its source in Canada and capital taxes on investments in commercial undertakings in Canada. The representative submits that the expression "capital taxes" in paragraph (d) of Article 34 really means "capital gains taxes" and such taxes are therefore excluded from the notion of "private income". Accordingly, because capital gains taxes can only be levied on investments in commercial undertakings in Canada, gains arising from the disposition of a personal residence cannot be taxed in Canada. XXXXXXXXXX

Analysis

Article 34 of the VCDR does not exempt XXXXXXXXXX from tax on the gain resulting from the disposition of their residence.

1) The Vienna Convention

The following articles of the VCDR are relevant:

Article 1

Aux fins de la présente Convention, les expressions suivantes s'entendent comme il est précisé ci-dessous:

a) l'expression "chef de mission" s'entend de la personne chargée par l'État accréditant d'agir en cette qualité;
[...]

e) l'expression "agent diplomatique" s'entend du chef de la mission ou d'un membre du personnel diplomatique de la mission;
[...]

i) l'expression "locaux de la mission" s'entend des bâtiments ou des parties de bâtiments et du terrain attenant qui, quel qu'en soit le propriétaire, sont utilisés aux fins de la mission, y compris la résidence du chef de la mission.

For the purpose of the present Convention, the following expressions shall have the meanings hereunder assigned to them:

(a) the "head of the mission" is the person charged by the sending State with the duty of acting in that capacity;
[...]

(e) a "diplomatic agent" is the head of the mission or a member of the diplomatic staff of the mission;
[...]

(i) the "premises of the mission" are the buildings or parts of buildings and the land ancillary thereto, irrespective of ownership, used for the purposes of the mission including the residence of the head of the mission.

Article 23

1. L'État accréditant et le chef de la mission sont exempts de tous impôts et taxes nationaux, régionaux ou communaux, au titre des locaux de la mission dont ils sont propriétaires ou locataires, pourvu qu'il ne s'agisse pas d'impôts ou taxes perçus en rémunération de services particuliers rendus.

2. L'exemption fiscale prévue dans le présent article ne s'applique pas à ces impôts et taxes lorsque, d'après la législation de l'État accréditaire, ils sont à la charge de la personne qui traite avec l'État accréditant ou avec le chef de la mission.

1. The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in respect of the premises of the mission, whether owned or leased, other than such as represent payment for specific services rendered.

2. The exemption from taxation referred to in this Article shall not apply to such dues and taxes payable under the law of the receiving State by persons contracting with the sending State or the head of the mission.

Article 34

L'agent diplomatique est exempt de tous impôts et taxes, personnels ou réels, nationaux, régionaux ou communaux à l'exception:

a) des impôts indirects d'une nature telle qu'ils sont normalement incorporés dans le prix des marchandises ou des services;

b) des impôts et taxes sur les biens immeubles privés situés sur le territoire de l'État accréditaire, à moins que l'agent diplomatique ne les possède pour le compte de l'État accréditant, aux fins de la mission;

c) des droits de succession perçus par l'État accréditaire, sous réserve des dispositions du paragraphe 4 de l'article 39;

d) des impôts et taxes sur les revenus privés qui ont leur source dans l'État accréditaire et des impôts sur le capital prélevés sur les investissements effectués dans des entreprises commerciales situées dans l'État accréditaire;

e) des impôts et taxes perçus en rémunération de services particuliers rendus;

f) des droits d'enregistrement, de greffe, d'hypothèque et de timbre en ce qui concerne les biens immobiliers, sous réserve des dispositions de l'article 23.

A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:

(a) indirect taxes of a kind which are normally incorporated in the price of goods or services;

(b) dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission;

(c) estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39;

(d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;

(e) charges levied for specific services rendered;

(f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23.

The VCDR is incorporated in part into Canadian domestic law by the Foreign Missions and International Organizations Act (the FMIOA)¹, and the Governor in Council, by way of order, extended some of the privileges and immunities conferred by the VCDR to representatives of foreign states to the ICAO. The extent of the privileges and immunities are found in the Headquarters Agreement between the Government of Canada and the International Civil Aviation Organization (The Headquarters Agreement) and under Article 12 of this agreement, it is provided that permanent representatives of a member State enjoys the same privileges and immunities as diplomatic agents and their family in Canada. The expression "diplomatic agent" is a defined term referring to the VCDR and it includes the head of the mission and the members of diplomatic staff.

Article 34 of the VCDR governs the taxation of diplomatic agents and they are exempt from tax unless such tax falls within one of the listed exceptions. The question we must now answer is whether the capital gain realised on the disposition of XXXXXXXXXX residence falls within one of the listed exceptions of Article 34 of the VCDR. Paragraph (b) of Article 34 of the VCDR provides that a diplomatic agent will not be exempt from dues and taxes on private immovable property in Canada unless the diplomatic agent holds it on behalf of the sending State for the purposes of the mission. In this situation, it is admitted by XXXXXXXXXX representative that XXXXXXXXXX did not hold the property on behalf of the sending State for the purposes of the mission. The property was held in the private capacity of XXXXXXXXXX. We would also like to stress that the benefits of Article 34 are extended to XXXXXXXXXX by virtue of Article 12 of the Headquarters Agreement and Article 37 of the VCDR.

It is submitted by XXXXXXXXXX representative that "dues and taxes on private immovable property" covers taxes related to holding property such as duties on the transfer of immovable and property taxes and does not deal with capital gains taxes on the disposition of property. We agree with this argument. Article 34 is structured to address the various forms of taxation that may be imposed by a State and paragraph (b) of Article 34 covers immovable property taxes and duties on the transfer of immovables.

Paragraph (d) allows Canada to tax a diplomatic agent on income having its source in Canada other than his or her official income. What is covered here is taxes that are attributable to individuals as part of their income; capital gains are comprised as part of the income of taxpayers in Canada. The term "private income" includes capital gains taxes and "capital taxes" does not mean capital gains tax. The VCDR is an international agreement that must be interpreted like any other international agreement by reference to articles 31 and 32 of the Vienna Convention on the Law of Treaties (the VCLT). Article 31 of the VCLT states "a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose". According to this interpretative rule, we are of the opinion that "capital taxes" should receive its ordinary meaning as being a tax on the value of assets and not a tax on the increase in the value of assets which would be categorized as a capital gains tax. This is confirmed by comparing the VCDR with the Vienna Convention on Consular Relations (the VCCR) which was done two years after the former convention and was also made part of Canadian domestic law by the FMIOA. Paragraph (d) of Article 49 of the VCCR is essentially the equivalent to paragraph (d) of Article 34 of the VCDR and it states in part:

Article 49

1. Les fonctionnaires consulaires et les employés ainsi que les membres de leur famille vivant à leur foyer sont exempts de tous impôts et taxes, personnels ou réels, nationaux, régionaux et communaux, à l'exception:

[...]
d) des impôts et taxes sur les revenus privés, y compris les gains en capital, qui ont leur source dans l'État de résidence, et des impôts sur le capital prélevés sur les investissements effectués dans des entreprises commerciales ou financières situées dans l'État de résidence;

1. Consular officers and consular employees and members of their families forming part of their households shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:

[...]
(d) dues and taxes on private income, including capital gains, having its source in the receiving State and capital taxes relating to investments made in commercial or financial undertakings in the receiving State;

In the VCCR, it is expressly stated that private income includes capital gains and in the same sentence is found the reference to "capital taxes". It is therefore obvious that for the purposes of the VCCR, "capital taxes" is not a synonym for "capital gains tax".

In considering the object and purposes of the VCDR we are not of the opinion that the absence of the specific reference to capital gains being part of private income should be inferred to exclude that notion.

The above remarks are sufficient to conclude that the gain realized on the disposition of XXXXXXXXXX residence is not exempt from tax based on paragraph (d) of

Article 34 of the VCDR.

We have also examined, on our initiative, the possible application of Article 23 of the VCDR because XXXXXXXXXX could be considered the "head of the mission" according to the VCDR. First, Article 23 essentially deals with taxes on the holding of properties such as immovable property taxes and duties on the transfer of immovables and does not deal with capital gains. Second, based on the representations of XXXXXXXXXX representative, such property was not held on behalf of the sending state for the purposes of the mission. Therefore, the property did not fall within the ambit of the term "premises of the mission" because in order for the residence of the head of the mission to qualify as such, the property must be used for the purposes of the mission. The facts in issue did not indicate such official usage. On the contrary, the residence was used and held in a private capacity and according to the Canadian practice as confirmed by the Department of Foreign Affairs Canada, such property could not be part of the premises of the mission. Such practice plays a role in the interpretation of the VCDR according to Article 31 of the VCLT.

2) The Capital Gains Calculation

We would like to confirm your position that Article 16 of the Headquarters Agreement finds application in determining the non-resident status of XXXXXXXXXX

Regarding the capital gains calculation on the disposition of a principal residence of a non-resident, the letter "B" in the formula found in paragraph 40(2)(b) of the Act can be equal to the number one.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

¹ 1991, c. 41.