23 January 1984 Income Tax Severed Letter B-4955 - [840123]

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.

Verification and Collections Division

R.J. Way

January 23, 1984

Non-Corporate Rulings Division Wm. R. McColm (613)995-2455 B-4955

XXXX

This is in reply to your memo of December 20, 1983 concerning the above taxpayers.

In your memo, you have asked whether the provisions of Article XVI of the Canada-U.K. Tax Convention (1978) override those of Article VII in the said treaty. In our view they do, but for the coming into force Article (as described below). The provisions of Article XVI are more specific than those of Article VII which are of a general nature. In addition, Article XVI(2) specifically states that Article XVI applies 'notwithstanding the provisions of Article VII'.

This conclusion is consistent with the intention of Article XVI which has been taken from the OECD model and reads as follows:

"Paragraph 2 permits the State in which the performance is given to impose a tax on the profits diverted from the income of the entertainer or athlete to the enterprise where for instance the entertainer or athlete has control over or rights to the income thus diverted or has obtained or will obtain some benefit directly or indirectly from that income. It may be, however, that the domestic laws of some States do not enable them to apply such a provision."

We are not aware that the letter sentence has application in Canada. Article XVI permits the income in question to be taxed in Canada. The "star company", which has received the income, by virtue of this provision does not qualify for the exemption normally applicable pursuant to Article VII.

The previous treaty (concluded in 1966) does not contain the provision found in Article XVI(2) of the current treaty. Thus, 'star company' arrangements to avoid Canadian taxes were usually effective under the previous treaty. The current treaty became effective in Canada in respect of taxes other than withholding tax for the 1976 taxation year and subsequent years. However, Article XXVIII(4) provides that if greater relief was afforded by any provision of the earlier treaty, such provision 'shall continue to have effect in Canada for any taxation year beginning before the entry into force of this Convention'. Since the current treaty came into force on December 18, 1980, income earned in taxation years beginning before that date of these star companies would be entitled to the protection afforded under the previous treaty.

for Director Non-Corporate Rulings Division

Can.-U.K. Convention Articles VII, XVI(2), XXVIII(4)