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 a motel would be considered immovable property for the purpose of Article 13(4) of the Canada-Germany Tax Agreement.
Position: Question of fact. However, we would generally not consider a full-service motel to be immovable property for the purpose of Article 13(4).
Reasons: A motel will not be immovable property if it is property (other than rental property) in which a motel business is carried on.
2005-011115
XXXXXXXXXX Devon Zhang
(613) 957-2104
August 20, 2007
Dear XXXXXXXXXX:
Re: Article 13 of the Canada-Germany Tax Agreement
We are writing in response to your electronic message of January 12, 2005 in which you requested our comments regarding the interpretation of Article 13 (4) of the Canada-Germany Tax Agreement (the "Treaty"). We apologize for the delay in replying.
The situation that you have described involves a resident of Germany ("Mr. X") who owns more than 10% of the shares of a Canadian resident company ("Canco"), which in turn has a wholly owned Canadian subsidiary ("Cansub"). The assets of both Canco and Cansub consist primarily of real estate used by Canco and Cansub in a motel business. We understand that the shares of Canco owned by Mr. X derive their value (through both the assets owned by Canco directly and the underlying assets of Cansub) principally (i.e., more than 50%) from real property situated in Canada.
Pursuant to Article 13(4) of the Treaty, gains derived by a resident of Germany from the alienation of shares forming part of a substantial interest of a company resident in Canada the value of which shares is derived principally from immovable property situated in Canada may be taxed in Canada. For the purpose of Article 13(4) of the Treaty, the term "immovable property" does not include "property (other than rental property) in which the business of the company... is carried on" (hereinafter called "Excluded Property").
You have asked for our comments on whether motels would be Excluded Property such that any gains realized on the disposition of the shares of Canco by Mr. X would not be subject to Canadian taxation pursuant to Article 13(4) of the Treaty.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
For real property to be considered Excluded Property, it must be property (other than rental property) in which the business of the company is carried on. Whether a business is carried on in a particular property is a question of fact. Normally, where real property is dedicated for use in an active business, the business would be considered to be carried on in the property. In addition, real property would not be considered rental property for the purpose of Article 13(4) of the Treaty unless the property was subject to a lease agreement that created a landlord/tenant relationship. In this respect, it is our view that a full-service motel would not normally constitute rental property for the purpose of Article 13(4) of the Treaty.
We trust that these comments are of assistance.
Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content