8 April 1992 Administrative Letter 9200896 F - U.K. Corps Being Discriminated With Cancorps (4093-u422)

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.

April 8, 1992

Appeals and Referrals Division          K.B. Harding

Appeals Branch     957-2111

Attention: P. Murphy

920089          

Subject: BICC Public limited Company v M.N.R.- Federal Court- Trial Division Non-Discrimination Article

This is in reply to your Memorandum of January 6, 1992 wherein you requested our views concerning the argument of BICC that the U.K. resident corporations which are subject to Part XIII tax are discriminated against in comparison to Canadian corporations deemed to be resident of Canada pursuant to subsection 250(4) of the Canadian Income Tax Act (the "Act").

It is our understanding that BICC made loans to Afton, a resident of Canada in 1977.  The loans by BICC were financed from the London branch of the Canadian Imperial Bank of Commerce (CIBC). The rate of interest charged on the loan to BICC by CIBC was identical to that which it charged to Afton. BICC does not have any ownership equity in Afton but is making such loan to secure a supply of raw material to be used in its operations.

The general position under the Act is that Canada does discriminate between residents and non-residents otherwise it could not provide incentives applicable only to Canadian residents (e.g. small business deduction) nor

could it provide special taxes which are only applicable to non-residents (e.g. branch tax).  Accordingly, in order to preserve its right to discriminate in such a manner, Canada has entered a reservation on Article 24 (Non-Discrimination) in both of the 1963 and 1977 OECD Model Double Taxation Conventions .  The reservation reads as follows:

Australia, Canada and New Zealand reserve their positions      on this Article.

Although subsection 250(5) of the Act does not apply to the 1977 taxation year, its existence further illustrates Canada's intention as expressed above.

The purpose of subsection 250(5) of the Act is to deem a corporation to be not resident of Canada if by virtue of a tax treaty the corporation is not subject to tax under Part 1 of the Act in Canada on any income from a source outside Canada.  This clarifies that for all purposes of the Act such a corporation will be treated in the same manner as are other non-residents. The fact that this provision overrides subsection 250(4) clearly indicates that the drafters of the subsection intended to discriminate as to the treatment between corporations deemed to be resident in Canada by subsection 250(4) of the Act and those which are subsequently treated as a resident of another country by virtue of a tax treaty (i.e. as if it were non-resident).

Paragraph 1 of the  "Non-Discrimination" provision of most of Canada's tax treaties including the Canada-U.K. Income Tax Convention (1978) (the "Convention") reads as follows:

The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. (Underlining for emphasis).

It is our view that a resident of Canada and a non-resident of Canada are not considered to be "in the same circumstances" and therefore the non-discrimination clause does not prohibit Canada from discriminating between residents and non-residents of Canada.

It is our understanding that many members of the OECD are in agreement with the view that residents and non-residents are not considered to be in the same circumstances.

The taxpayer's representative would have to argue that a Canadian corporation (a national of Canada) which has its mind and management in the United Kingdom is in the same circumstances as BICC, a national of the United Kingdom, since both companies are residents of the United Kingdom.  In our view, where the former corporation is a dual resident of Canada and the United Kingdom, it cannot be considered to be in the same circumstances as BICC since the latter corporation is resident only in the United Kingdom.  Therefore, in accordance with the above Canada would be permitted to discriminate between the two entities.

In a situation where a Canadian corporation argues that it is a resident of the United Kingdom by virtue that its mind and management resides in the United Kingdom, the competent  authorities of Canada and the United Kingdom, by mutual agreement, will endeavour to determine the residency of the company for purposes of the Convention .  It is not clear, based on the limited information provided, that the competent authorities (in particular the Canadian competent authority) would agree that such a company would be a resident of the United Kingdom for purposes of the Convention.  There could be circumstances where the Canadian and United Kingdom authorities could not reach a consensus on the residency of a particular corporation, especially in situations where the movement of mind and management to the United Kingdom was motivated by tax avoidance in Canada.  Even if it is determined by the competent authorities that a particular company is a resident of the United Kingdom for purposes of the Convention, that company would continue to be a resident of Canada for Canadian taxation purposes subject to any relief provided by the Convention.

It should be noted that application of the non-discrimination article in the manner suggested by the taxpayer would give the absurd result of Canada not being able to apply withholding tax on dividends paid by a corporation resident in Canada to any corporation resident in the United Kingdom whether dual residents or not.  Clearly one could not argue that this was the intention of the negotiators of the Convention.

In summary, Canada does discriminate between residents and non-residents and in negotiating tax treaties with other countries they have preserved that right by virtue of reservation in the OECD Model and the wording and interpretation of the applicable article in its tax treaties.

We trust this is adequate for your purposes.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch