17 November 2025 External T.I. 2020-0854261E5 - German Treaty - Art.13

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: A Canadian corporation, Opco, with more than five full-time employees, operates a student housing operation offering multiple services to its residing students. Opco’s value is derived almost entirely from its real property situated in Canada and used exclusively in its student housing operations. Opco's shareholder is Canco which derives substantially all of its value from its investment in Opco. All of the issued shares of Canco are beneficially owned by individuals resident in Germany who each own at least 10% of its shares. 1) Is Opco's real property considered "property (other than rental property) in which the business […] is carried on" under Article 13(4) of the Canada-Germany Tax Agreement? 2) Is the gain on the disposition of the shares of Canco by residents of Germany exempt from taxation in Canada? 3) If not, would the fact that Opco employs more than five full-time employees in its operation change that outcome?

Position: 1) No 2) No 3) No.

Reasons: Even if the student housing operations generate business income carried on in a property, the carve-out rule under Article 13(4) of the Treaty would still not apply in the scenario provided by the taxpayer regardless of the type of income that it generates. For the carve-out rule to apply, the property must not be a rental property. However, since the houses are rented out to students, the student housing operations have the traits of a rental property and this would not change based on the type of income generated or based on the fact that Opco employs more than five-full time employees.

XXXXXXXXXX									2020-085426
 										Isabelle Sauvé

November 17, 2025

Dear XXXXXXXXXX,

Re: Technical interpretation – Article 13(4) of the Canada-Germany Tax Agreement (footnote 1)

This is in response to your letter in which you requested a technical interpretation regarding the meaning of "property (other than rental property) in which the business […] is carried on" under Article 13(4) of the Canada-Germany Tax Agreement. More specifically, in the context of the facts described below, you ask whether the capital gain generated at the time of the alienation of the shares of Canco would be subject to taxation in Canada. We apologize for our delay in responding to your request.

All references herein are to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, ("the Act") or to the provisions of the Canada-Germany Tax Agreement ("the Treaty"), unless otherwise stated. This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Facts:

The hypothetical facts outlined in your letter are as follows:

• Canco is a Canadian corporation resident in Canada under the Act and the Treaty.
• All the issued shares of Canco are beneficially owned by individuals resident in Germany who each own at least 10% of its shares.
• Canco owns all of the issued shares of Opco.
• Opco carries on post-secondary student housing operations in Canada, which provides long-term (12 month) furnished accommodations for students. The monthly fees charged to students include various services or arrangements provided by Opco, including: utilities, internet (unlimited data), gym, games room, lounge and patio, BBQ area, book exchange, concierge services, security, social coordinator, mail services, parlour ice cream shop, 24 hour hotline, pancake breakfasts, canine therapy events and movie nights. Additional services or arrangements available on-site at additional costs include: parking, storage, laundry, coffee station, vacuum use, yoga classes, and scooter and car rental services.
• Opco uses the immovable property principally for rental purposes and its revenues comes principally from rental activities.
• Opco employs more than five full-time employees in its aforementioned operations.
• Opco’s value is derived almost entirely from its real property situated in Canada and used exclusively in its student housing operations.
• Substantially all of the value of Canco is attributable to its investment in Opco.

Questions

Would the nature and level of services provided by Opco to its customers result in its property being considered "property (other than rental property) in which the business [of Opco] is carried on" for purposes of Article 13(4) of the Treaty? If not, would the fact that Opco employs more than five full-time employees in its operations result in its property being considered "property (other than rental property) in which the business [of Opco] is carried on" for purposes of Article 13(4) of the Treaty?

Comments

Article 13(4) of the Treaty specifies that the disposition of shares forming part of a substantial interest in the capital stock of a company resident of Canada which derives principally its value from immovable property situated in Canada is taxable in Canada except if the immovable property is "property (other than rental property) in which the business of the company is carried on" ("the business property exemption"). (footnote 2)

The provision specifically excludes "rental property" from the business property exemption. In your letter, you suggest that the exemption in Article 13(4) of the Treaty should apply in this situation the same way that it would apply to a full-service motel or hotel operation. However, in our view, there are significant differences between student housing operations and hotels which would make the former a rental property.

The common meaning of the term "rental property" in Article 13(4) of the Treaty is broad enough to include houses that are rented out to students. Even considering the services provided that are described above, the structure of student housing operations have the traits of a rental property in light of the use that the students make of the property as well as the purpose and the nature of the arrangement between the parties.

In your letter, you also suggest that if the rental income is considered to be business income, it might not be a rental property. However, in our view, the student housing operations consists of the rental of property for purposes of the Treaty regardless of the type of income it generates. Concluding otherwise would make the specific carve out in that provision for rental property in which "the business of the company […] is carried on" superfluous. If it was accepted that all property used in a business is not rental property, the exception would bear no meaning.

Finally, your letter refers to the full time employees test in some provisions of the Act. The fact that Opco employs more than five full-time employees has no incidence on the answers above. That is only relevant under certain definitions in the Act like "investment business" under subsection 95(1) of the Act and "specified investment business" under subsection 125(7) of the Act, which are not relevant for the application of Article 13(4) of the Treaty.

We trust that our comments will be of assistance,

Yours truly,

Yves Grondin
Section Chief
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. Agreement Between Canada and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Certain Other Taxes, the Prevention of Fiscal Evasion and the Assistance in Tax Matters signed on April 19, 2001.

2. This exception was considered in Canada v. Alta Energy Luxembourg S.A.R.L. (2021), 2021 SCC 49, 2021 CSC 49, 2021 CarswellNat 5176, 2021 CarswellNat 5177, 2021 D.T.C. 5125, (sub nom. La Reine c. Alta Energy) 2021 D.T.C. 5126, [2022] 1 C.T.C. 271, 464 D.L.R. (4th) 1, 23 B.L.R. (6th) 1 (S.C.C.).