Société générale valeurs mobilières – Tax Court of Canada finds that a Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income

Although there was limited illumination in the questions of law posed by the Crown under Rule 58(1), the SGVM case seemed to entail the question of whether a tax sparing provision in the Canada-Brazil Treaty, which deemed a Canadian taxpayer to have paid 20% Brazilian withholding tax on interest received by it from Brazil, had the effect of providing to it a Canadian foreign tax credit equal to the amount of that fictional tax, even though its effective Canadian tax rate on that interest income was much lower than 20% (perhaps because of applicable leverage). This question turned on the meaning of a proviso in the Treaty, which stated that the FTC otherwise required by the Treaty to be accorded by Canada:

shall not… 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.

Paris J, in rejecting the taxpayer’s position (and affirming the Crown's position that the FTC effectively should be limited to the low effective Canadian tax rate on the Brazilian interest income), stated, among many other things:

It seems unlikely that the tax sparing provision was intended…to operate to shelter not only Brazilian interest income from Canadian tax, but income from other sources unrelated to Brazil as well. …

In addition, the provision quoted above was similar to the equivalent in the 1977 OECD Model Convention, except that the OECD provision used the word “attributable” rather than “appropriate” (although, both provisions used “correspondant” in their French versions). Paris J noted that the related OECD Commentaries stated that the limitation on the FTC deduction is “normally computed as the tax on net income, i.e. on the income from [the State of source] less allowable deductions.”

Neal Armstrong. Summary of Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131 under Treaties – Art. 24.