23 March 2009 Internal T.I. 2008-0304441I7 - Gain on shares - Canada-Israel Tax Convention

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: Are the shares of Canholdco held by its Israeli parent considered to be property that consists primarily of immovable property situated in Canada such that Article XIII(3) of the Canada-Israel tax treaty applies?

Position: No. Under certain circumstances which do not seem to arise in the particular situation, we would consider applying 245(2) of the Act.

Reasons: We maintain our previous position that when the expression "consist of" is used without the words "directly or indirectly", only the assets held directly by the parent will be considered. Therefore, Article XIII(3) will not apply to a non-resident that disposes of shares of a holding company whose assets consist of shares of other companies.

									March 23, 2009

W. D.  Scott CMA						HEADQUARTERS
	International Audit Division				Income Tax Rulings
	London Tax Services Office	  			Directorate
									Sylvie Labarre, CA

									2008-030444

Article XIII(3) of the Canada - Israel Tax Treaty (1975)

We are writing in response to your memorandum of December 9, 2008 in which you requested our interpretation of Article XIII of the Canada - Israel Income Tax Convention, 1975 (the "Treaty").

Facts

An Israeli company owns all of the common shares of a Canadian Holdco ("Canholdco") that in turn owns shares in Canadian subsidiaries principally involved in XXXXXXXXXX . The Israeli company conveys the shares of its Canholdco to Israeli subsidiary companies and claims a treaty exemption on the gain realized on the disposition of the shares of Canholdco.

Question

Are the shares of the Canholdco held by its Israeli parent considered to be property that consists primarily of immovable property situated in Canada such that Article XIII(3) of the Treaty applies or whether Article XIII(4) of the Treaty applies to exempt the capital gain from Canadian income tax?

Our comments

Article XIII(3) of the Treaty provides that "gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State."

Article XIII(4) of the Treaty provides that "gains from the alienation of any property, other than those mentioned in paragraph 1, 2 and 3 shall be taxable only in the Contracting State of which the alienator is a resident.

The position of the CRA, taken in numerous files, is that where the words "shares of a company the property of which consists principally of immovable property" are used in a look-through provision of an income tax convention, as they are in paragraph 3 of Article XIII of the Treaty, the non-resident will not be liable to tax in Canada where the non-resident is disposing of shares of a holding company whose assets consist of shares of other companies (considering only the assets directly owned by the company). That position is not an administrative position XXXXXXXXXX The Department of Finance was made aware of our interpretation and changed the expression used in the Canadian model for "derived principally".

As the UN and OECD treaty models do not use the same wording as the Treaty, the interpretation of the expression used in those models can be different. The OECD model uses the expression "deriving more than 50% of their value directly or indirectly" which we consider as being broader than "consists principally". The expression "consists directly or indirectly" is the expression that the UN preferred for article 13 as indicated in the Manual for the negotiation of bilateral Tax Treaties and it is another expression that we consider broader than "consists principally".

In your analysis, you referred to the definition of "Canadian real, immovable or resource property" found in subsection 248(1) as being a definition of "immovable property" used for Canadian tax law purposes. We do not agree with your view. What is defined in subsection 248(1) is the complete expression "Canadian real, immovable or resource property" that is used in the SIFT rules. That definition does not apply to an expression formed with some of the words included in the complete expression. Therefore, the expression "immovable property" is not defined in the Act.

We maintain the position taken in previous years and our view is that Article XIII(4) of the Treaty applies to exempt the capital gain from Canadian income tax. However, under certain circumstances that do not seem to arise in your particular situation, CRA will consider the application of the general anti-avoidance rule in section 245 of the Act if it is evident that in contemplation of a sale of the shares of a particular Canadian company a structure was put in place in an attempt to obtain tax relief from an income tax convention.

We trust that our comments will be of assistance.

Yours truly

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