27 July 1990 Ruling 901351 F - Canada-Australia Income Tax Convention on Capital Gains

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:  24(1) Canada-Australia Income Tax Convention

This is in reply to your Memorandum dated June 18, 1990 whereby you requested our opinion as to whether residents of Australia are exempt from Canadian tax liability in respect of capital gains realized on the disposition of taxable Canadian property, particularly shares in the capital stock of a corporation resident in Canada (other than a public corporation), by virtue of the Canada-Australia Income Tax Convention (1980) (the "Treaty").

After informal discussions with the Tax Treaties Group, Tax Policy-Legislation Division of the Department of Finance, we have recently confirmed our position that the Treaty does not provide residents of Australia with any exemption or reduction of Canadian tax liability in respect of capital gains realized on the disposition of taxable Canadian property.

Article 13 does not by its terms grant any exemption or reduction.  We do not accept the argument that it is implicit that capital gains in respect of property not specifically referred to in Article 13 are not taxable by Canada.

We have been advised orally by the Department of Finance that the principal purpose of Article 13 was to permit Canada to tax Australian residents in respect of income (e.g. business income including an adventure in the nature of trade) from the disposition of property of the kind specifically mentioned in Article 13 irrespective of whether the Australian resident had a permanent establishment in Canada.  In this regard, you will observe that Article 13 refers to "Income or gains...".  The Department of Finance has also advised that at the time the Treaty was negotiated Australia did not tax capital gains and that Canada had no intent and did not agree to give up its right to tax capital gains realized by Australians, there being no double taxation of capital gains and no quid pro quo available to be offered by Australia in exchange for Canada giving up its right to tax capital gains.  The reference to "gains" in Article 13 was apparently included out of an abundance of caution and not to be the basis of an implied exemption for all other gains.

We are of the opinion that Article 21 of the Treaty does not apply to capital gains.  Article 21, by its terms, applies to "income". There is long standing judicial precedent that a capital gain is not income.  We understand that the law of Australia is consistent with Canadian law in this regard.  We also note that the Treaty, i.e. Article 13, refers to both "income" and "gains" and thus recognizes the distinction between the two terms.

K.B. Harding for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch