8 April 2009 Roundtable, 2008-0272371C6 - Limitation of Benefits

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: How will Canada interpret the reference to "in connection with or incidental to" in applying paragraph 3 of Article XXIX A of the Canada-US Income Tax Convention, as amended by the Fifth Protocol (the "Canada-US Treaty") - what is the required nature of the connection, and the required degree of the connection?

Position: See below.

Reasons: Technical Explanation to the Canada-US Treaty

IFA 2008

April 8 2009

Question

Paragraph 3 of Article XXIX A of the Canada-US Income Tax Convention, as amended by the Fifth Protocol (the "Canada-US Treaty") provides, in part, as follows:

"Where a person is a resident of a Contracting State and is not a qualifying person, and that person, or a person related thereto, is engaged in the active conduct of a trade or business in that State..., the benefits of this Convention shall apply to that resident person with respect to income derived from the other Contracting State in connection with or incidental to that trade or business..."

How will Canada interpret the reference to "in connection with or incidental to" in applying paragraph 3 of Article XXIX A - what is the required nature of the connection, and the required degree of the connection?

Response

Whether income is derived in connection with or incidental to a trade or business is a question of fact. It is therefore difficult to answer the question except in the context of a particular set of facts.

We will welcome any guidance provided in the Technical Explanation and we expect we will be able to obtain guidance from how the Courts have interpreted these terms in the context of the Income Tax Act.

Court cases dealing with similar expressions used in the Income Tax Act

"In connection with":

Although the expression "in connection with" would appear to have a broad connotation, the Court indicated in the case of Gene A. Nowegijick v. the Queen (83 DTC 5041), that such an expression is not as wide in scope as the expression "in respect of". This decision suggests that in order for an item of income to be considered derived "in connection" with an active trade or business, there should be a direct connection between the item of income and the active trade or business.

"Incidental to"

There are a number of decisions of the Court dealing with whether property is "incident" or "pertains to" an active business carried on by the corporation (itself) for the purposes of specific provisions of the Act. The decisions in Atlas Industries Ltd. v. MNR, 86 DTC 1756 (TCC) and McCutcheon Farms Limited v. The Queen 91 DTC 5047 (FCTD), suggest that there must be a financial relationship of some substance between the property and the active business before the income from the property can be said to be incident to the active business.