10 January 1996 External T.I. 9531645 - FARM INCOME RECEIVED BY A U.S. CHARITY - ARTICLE 21

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.

Principal Issues:

Whether paragraph 3 of Article XXI of the Canada-U.S. Treaty will apply to deny the U.S. charity exemption from Canadian where the charity is receiving, among other sources, Canadian source "farm income"?

Position:

Possibly.

Reasons:

Paragraph 3 of Article XXI will only override paragraph 1 of Article XXI only to the extent of the U.S. charity's income from carrying on a trade or business. Whether the farm income (in this case the taxpayer did not explain whether the "farm income" was from an active farm operation or simply leasing of farm property) constitutes income from carrying on a trade or business is purely a question of fact.

						953164
XXXXXXXXXX						Jim Wilson

Attention: XXXXXXXXXX

January 10, 1996

Dear Sirs:

Re: Article XXI of the Canada-U.S. Income Tax Convention (the "Treaty")

We are writing in response to your letter of November 27, 1995 in which you requested our opinion with respect to the application of paragraphs 1 and 3 of Article XXI of the Treaty. You have described a situation involving a tax exempt charitable organization resident in the United States (the "U.S. charity"). The U.S. charity is receiving investment income from Canada as well as "farm income" from Canada. You wish to know whether paragraph 3 of Article XXI of the Treaty will apply to deny the U.S. charity exemption from Canadian tax pursuant to paragraph 1 of Article XXI.

It appears that the interpretation you seek relates to a completed transaction undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation (copy enclosed). Confirmation with respect to completed transactions involving specific taxpayers will only be provided by a tax services office. However, we can provide the following general comments.

Paragraph 3 of Article XXI will only override paragraph 1 of Article XXI to the extent of the U.S. charity's income from carrying on a trade or business. That is, any Canadian source income received by a U.S. charity that is not related to the carrying on of a trade or business would be exempt from Canadian tax pursuant to paragraph 1 of Article XXI of the Treaty, if such income is otherwise exempt from U.S. tax, regardless of whether the U.S. charity is also carrying on a trade or business in Canada.

It is a question of fact whether the "farm income" described above would constitute income "from carrying on a trade or business". You have not explained what you mean by "farm income" nor have you provided us any information that would enable us to comment on such a determination. In the event the "farm income" earned by the U.S. charity is in fact its share of farming profits from an active farming operation (eg. the U.S. charity is a proprietor or partner in an actual farming operation), then such "farm income" would clearly constitute income "from carrying on a trade or business" and would not be exempt from Canadian tax. On the other hand, if the "farm income" represents profits from the leasing of land and buildings to other parties (eg. Canadian farmers), then such income may very well constitute investment income (i.e. income from property) and thus may be exempt from Canadian tax pursuant to paragraph 1 of Article XXI of the Treaty if such income is otherwise exempt from U.S. tax. In this regard, we have enclosed Interpretation Bulletins IT-434R and IT-433R, entitled "Rental of Real Property by Individual" and "Farming or Fishing - Use of Cash Method", respectively, which provides our Department's views on this issue.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch