13 January 2014 External T.I. 2013-0512581E5 - Sale of shares of Brazilian corporation

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.

Principal Issues: Whether a taxable capital gain from the sale of shares of a company resident in Brazil is "income" for the purposes of paragraph 2 of Article 22 of the Canada-Brazil Income Tax Convention?

Position: Yes

Reasons: The CRA considers the term "income" in paragraph 2 of Article 22 of the Canada-Brazil Income Tax Convention to include taxable capital gains realized on the sale of shares of a Brazilian company.

XXXXXXXXXX
Angelina Argento
2013-051258
(514)283-7895

January 13, 2014

Dear XXXXXXXXXX,

Re: Foreign Tax Credit in respect of Brazilian tax paid on Capital Gains

We are responding to your electronic message of November 20, 2013 wherein you request the Canada Revenue Agency's ("CRA") views regarding the term "income" as used in paragraph 2 of Article 22 of the Canada-Brazil Income Tax Convention (the "Treaty"). In the scenario you describe, a resident of Canada ("Canco") disposes of shares of a company which is resident in Brazil ("BrazilCo") and realizes a capital gain ("Capital Gain"). In accordance with Article 13 of the Treaty, Brazil may tax and does in fact tax the Capital Gain.

Generally, subsection 126(1) of the Income Tax Act ("Act") permits a taxpayer who is resident in Canada to claim a foreign tax credit ("FTC") against Canadian tax otherwise payable, in respect of foreign income taxes imposed on non-business income from sources in a foreign country. If there is no non-business income from a source in the foreign country to which the foreign taxes were paid, no FTC can be computed under the provisions of subsection 126(1) of the Act.

It is our understanding that in respect of the sale of the shares of BrazilCo, the contract of sale was negotiated, signed and executed in Canada and payment was made in Canada; as a result, the Capital Gain is sourced to Canada (footnote 1). It is also our understanding that Canco has no other Brazilian source income. Since the Capital Gain is from a Canadian source and Canco has no other Brazilian source income, no FTC can be computed under the provisions of section 126 of the Act for any income or profits tax paid by Canco to the government of Brazil in respect of the Capital Gain. However, the provisions of paragraph 2 of Article 22 of the Treaty provide that Canada shall allow a deduction from Canadian tax in certain circumstances. You ask whether the term "income" as used in paragraph 2 of Article 22 of the Treaty would include taxable capital gains.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Paragraph 2 of Article 22 of the Treaty provides as follows:

"Unless the provisions of paragraph 4 or 5 apply, where a resident of Canada derives income which, in accordance with the provisions of this Convention, may be taxed in Brazil, Canada shall allow as a deduction from the tax on the income of that person, an amount equal to the income tax paid in Brazil, including business-income tax and non-business-income tax. The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil."

In our view the term "income" in paragraph 2 of Article 22 of the Treaty includes taxable capital gains. Therefore, pursuant to paragraph 2 of Article 22 of the Treaty, Canco can claim a deduction from tax for any income or profits tax paid to the government of Brazil in respect of the Capital Gain. This deduction from tax would be computed independent of the provisions of section 126 of the Act; however, in accordance with the provisions of paragraph 2 of Article 22 of the Treaty, the deduction from tax will be limited to the amount of Canadian income tax otherwise payable on that Capital Gain.

We trust that the above is of assistance to you.

Yours truly,

Olli Laurikainen CPA, CA
International Section II
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Income Tax Folios S5-F2-C1: Foreign Tax Credit, paragraph 1.65 available at http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s5/f2/s5-f2-c1-eng.html#p1.4fnb.