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: Will the Canadian Competent Authority enter into an agreement to defer recognition of income, profit or gain where the income, profit or gain is exempted or excluded from taxation under the domestic laws of the residence state?
Position: No.
Reasons: Canadian Competent Authority requires taxpayers seeking a deferral agreement to demonstrate that income, profit or gain for which an agreement is being sought is only deferred - not exempted or excluded from taxation under the domestic laws of the residence state.
International Fiscal Association (IFA) Conference
Canada Revenue Agency Roundtable
May 17, 2012
Competent Authority Agreements
Question
Some of Canada's tax treaties contain a provision in the Gains Article that allows the competent authority of a contracting state to enter into an agreement with a resident of the other contracting state to defer, on terms satisfactory to the competent authority, the recognition of the profit, gain or income realized in the course of a corporate organization, reorganization, amalgamation, division or similar transaction. Under the Canada-United States Tax Convention (the "U.S. Treaty"), the deferral provision (paragraph 8 of Article XIII) specifically states that the competent authority may agree, "in order to avoid double taxation", to defer the recognition of the profit, gain or income. In this respect, we note that, unlike the U.S. Treaty, the deferral provision in some of Canada's other tax treaties does not contain a specific reference to the purpose of the provision (i.e., the avoidance of double taxation). Is it the CRA's view that the purpose of the deferral provision under these other treaties may extend beyond providing relief from double taxation? If so, would the Canadian Competent Authority be willing to enter into a deferral agreement under one of these other treaties where the profit, gain or income is exempted or excluded from taxation under the domestic laws of the residence state?
Response
In our view, each of the deferral provisions in Canada's tax treaties is intended to achieve the same policy objective to assist the competent authorities in addressing issues of potential juridical double taxation attributable to timing differences in the recognition of the profit, gain or income. Accordingly, in determining whether to exercise its discretion to provide a deferral agreement under any of Canada's tax treaties, the Canadian Competent Authority's primary concern is whether the agreement would further the policy objective of avoiding potential double taxation. In this respect, the Canadian Competent Authority requires taxpayers seeking a deferral agreement to demonstrate that the profit, gain or income for which an agreement is being sought is only deferred - not exempted or excluded - from taxation under the domestic laws of the residence state.
More specifically, the Canadian Competent Authority's position is that the guidance provided in paragraphs 76 to 85 of Information Circular 71-17R5, under the heading "Deferred Recognition of Profits, Gain or Income Pursuant to Paragraph 8 of Article XIII Gains", is equally applicable to all requests made under the deferral provisions in any of Canada's tax treaties. The same conditions for eligibility will be applied and the Canadian Competent Authority will require the same information to be included in a request for a deferral whether the request is made pursuant to Article XIII(8) of the U.S. Treaty or a deferral provision in one of Canada's other tax treaties.
In addition, as explained at the 2007 IFA Conference, where a request for deferral is accepted by the Canadian Competent Authority, the agreement will be subject to a number of conditions, one of which provides for the immediate recognition of the deferred gain upon the occurrence of certain triggering events during the deferral period. The same conditions will apply whether the agreement is made pursuant to the deferral provision of the U.S. Treaty or another treaty.
Rob Demeter
2012-044416
May 17-18, 2012
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