8 February 1995 External T.I. 9416555 - APPLIC. OF PARAGRAPH 1 OF ARTICLE XXI OF 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.

				941655
XXXXXXXXXX				David R. Senecal

February 8, 1995

Dear XXXXXXXXXX:

This is in reply to your letters of June 23 and August 30, 1994, regarding the application of paragraph 1 of Article XXI of the Canada-United States Income Tax Convention. We apologize for the delay in responding.

As indicated in paragraph 21 of Information Circular 70-6R2, interpretations relating to contemplated transactions are to be requested in the form of an advance ruling request. Notwithstanding the foregoing, we offer the following general comments which may or may not apply to your particular situation.

In our view, the mere fact that a United States charitable entity is exempt from taxation under the domestic taxation laws of that State, would not prevent the entity from meeting the definition of a "resident of a Contracting State" as that term is defined in paragraph 1 of Article IV of the Canada-United States Income Tax Convention (the "Convention"). It is implicit from the existence and wording of paragraph 1 of Article XXI of the Convention that exempt charitable entities would normally be considered as residents for the purposes of the Convention and thereby qualify for treaty entitlement.

This view is supported by the fact that the proposed amending Protocol to the Convention, which was signed on August 31, 1994, provides that paragraph 1 of Article IV of the Convention is to be amended to clarify

that the definition of a resident of a Contracting State includes a not-for-profit organization that was constituted in a Contracting State and that is by reason of its nature as such, generally exempt from income taxation in that State.

Where the exempt organization is incorporated in the United States but is also a factual resident of Canada for purposes of the Income Tax Act (the "Act"), based on central management and control being exercised in Canada, the organization would be deemed, pursuant to paragraph 3 of Article IV of the Convention, to be a resident of the United States for purposes of the Convention.

Consequently, where income of the organization from a source outside Canada would not be subject to tax under Part I of the Act by virtue of paragraph 1 of Article XXI of the Convention, subsection 250(5) would apply to deem the organization not to be a resident of Canada for purposes of the Act. Having said this, we are not in a position to determine whether paragraph 1 of Article XXI would, in fact, apply as we are unable to evaluate the consequences of moving the mind and management of the U.S. charitable entity to Canada on its tax exempt status in the United States.

We would also point out that, in a situation where the exempt organization is deemed not to be a resident of Canada by virtue of subsection 250(5) but has income from carrying on business in Canada, paragraph 3 of Article XXI of the Convention would apply and that income would not be exempted from taxation in Canada on the basis of paragraph 1 of the same Article.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of the above-mentioned Information Circular and are not binding on Revenue Canada.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch