21 July 1989 Administrative Letter 89M07206 F - Residence Status of Exempt Organizations

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.

Subject: Residence Status of Exempt Organizations

19(1)  have asked whether we would consider an Australian Non-Profit Society (a "Society") to be a resident of Australia for purposes of the Australian Convention. They have a Canadian company as a client who is a subsidiary of a Society. The Canadian company is paying dividends to and is renting equipment from the Society.  These dividend and rental payments are subject to Canadian Part XIII tax.  19(1)  are concerned that we will interpret paragraphs 1 and 2 of Article $ ("Articles 4(1) and 4(2)") (a photocopy of which is attached) of the Australian Convention in such a manner that the Society will not be considered to be a resident of Australia for purposes of this Convention and will thus not be entitled to the benefits contained therein (e.g. reduced withholding rates on amounts subject to Canadian Part XIII tax).

We have reviewed Articles 4(1) and 4(2) of the Australian Convention and in our opinion these two provisions could be interpreted to deny treaty protection to a Society in this situation because:

1)     Australian tax law considers a Society of this nature to be resident in and subject to tax in Australia. It then exempts the Society from Australian taxation provided certain conditions are met. Accordingly, the Society may be considered to be a resident of Australia for the purposes of Article 4(1) of the Australian Convention Because it would be considered to be a resident of Australia for purposes of its tax.

2)     As the Canadian source income of the Society would be exempt from Australian tax because the Society is a non-profit organization and not solely because such income is subject to Canadian tax, Article 4(2) of the Australian Convention applies to cause the Society to not be considered a resident of Australia for all purposes of this Convention.

We have enclosed a copy of our proposed reply to 19(1)  for your information.

In view of 19(1)  concerns about the treatment of exempt organizations under the Australian Convention please provide us with your views as to whether the negotiators of the Australian Convention intended that exempt organizations (such as the Society) be entitled to the benefits contained in the Australian Convention.

In addition to the above we would also like to know whether it was intended that exempt organizations come under the residence definition in other treaties. For example, the definition of residence in the Canada-U.S. Income Tax Convention ("the U.S. Convention") is contained in paragraph 1 of Article IV. It provides that a person is a resident of one of the contracting states if he is liable to tax in that state by reason of residence. As you are aware it was only after consultation with the Department of Finance that we adopted the practice of pension funds etc. being resident in a contracting state for the purposes of the U.S. Convention for provisions other than Article XXI. In our view exempt organizations which do not fall within Article XXI of the U.S. Convention are not residents of a contracting state for the purposes of that convention.

Other than exempt organizations described in Article XXI of the U.S. Convention, was it intended that exempt organizations be considered resident in a contracting state for purposes of any treaty in order that they receive the benefits of the treaty? If this was the intention and the residence definition in a particular treaty indicates that a person is resident in one of the contracting states if he is liable to tax in that state by reason of residence, how do we overcome the fact that exempt organizations are not liable to tax in a contracting state in spite of being resident in that state.

M.A. Hiltzfor Director GeneralSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch