17 November 1993 Income Tax Severed Letter 9321817 - Articles VI and VII—Canada–U.S. Treaty

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                           November 17, 1993

  Vancouver District Office                Rulings Directorate
                                           K. Major
  Attention: J. Byers Section 442-30       (613) 957-8953

                                           932181

INTERPRETATION OF ARTICLE VI AND VII OF THE CANADA–U.S. INCOME TAX CONVENTION

This is further to your letter of June 14, in which you have asked for our comments on your interpretation of the interrelationship of Article VI and VII of the Canada–U.S. Income Tax Convention (hereinafter "Convention"). You have informed us that in the opinion of XXXXXXXXXX, a non resident carrying on business without a permanent establishment in Canada who disposes of its inventory of real property situated in Canada would not be taxable in Canada on the profits from the sale. As a matter for the record there has not been sufficient information provided to establish that XXXXXXXXXX, does not in fact have a permanent establishment in Canada with respect to his alienation of the real property in question.

XXXXXXXXXX interpretation appears to rest on the presumption that Article VII takes precedence over Article VI in the Convention.

We disagree with this interpretation.

Paragraph 1 of Article VI of the Convention sets out the rule that income derived by a resident of a Contracting State from real property situated in the other Contracting State may be taxed in that other State. This Article gives the right to tax income from real property to the State of source, that is, the State in which the property producing such income is situated. Article VI of the Convention leaves open the question of taxation of income from real property by the State of residence by using the permissive word "may" in the Convention. With respect to the use of the word "may" we draw your attention to paragraph 7 of the Commentary on Article 23 of the OECD MC. Paragraph 3 of Article VI of the Convention further extends the scope of the rule in paragraph 1 to clarify that;

the provisions of paragraph 1 shall apply to income derived from the direct use, letting or use in any other form of real property and to income from the alienation of such property

This paragraph indicates that the rule in paragraph 1 applies irrespective of the form of exploitation of the real property. The words "income derived from property" would not under common usage include income from the disposition of such property. However, the scope of Article VI of the Convention is expressly extended by paragraph 3 to include income from the alienation of real property. In our opinion, paragraph 3 of Article VI of the Convention should be interpreted as including the profits from the real property, disposed of in the ordinary course of carrying on business, thus extending the general rule in this Article to "Business Income".

We also note that paragraph 3 of Article VI of the Convention departs from the OECD MC and specifically allows the State of source to tax "income from the alienation of property". It is our opinion that the inclusion of these words in the Convention has the same effect as the provisions of paragraph 4 of Article 6 the OECD MC which specify that the State of source has priority over the right to tax by the other State even if the income derives from a business without a permanent establishment in the State of source.

The country of situs has clearly maintained its right to tax gains from the alienation of real property in Article XIII of the Convention and business profits from such alienation, where there is a permanent establishment, in Article 7 of the Convention. If XXXXXXXXXX interpretation were to prevail, the words "income from the alienation of such property" in paragraph 3 of Article VI would be meaningless.

The Technical Explanation to paragraph 6 of Article VII of the Convention explains the relationship between the provisions of Article VII and other provisions of the Convention. It clearly indicates that;

Where business profits include items of income which are dealt with separately in other Articles of the Convention, those other Articles are controlling.

Those other Articles, such as the more specific Article VI, "Income From Real Property", should take precedence over the more general Article of "Business Profits".

In summary, Article VI of the Convention, because it is the more specific provision, applies to business profits earned from the alienation of real property situated in Canada even if the US resident alienator does not have a permanent establishment in Canada. (See "The Canadian United States Income Tax Treaty," in the Report of Proceedings of the Thirty-second Tax Conference, 1980 Conference Report, page 379 and pages 394 and 395.)

Should you have any questions please contact Ken Major at (613) 957-2124. In addition the Foreign Section of the Rulings Directorate would appreciate being kept informed of any further developments in this case.

Yours truly,

for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch