1 June 2018 External T.I. 2017-0723051E5 - Meaning of "Relieved from Tax"

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: What is the meaning of the phrase "relieved from tax" in Article 27(2) of the Canada-UK Income Tax Convention (“the Canada-UK Treaty”)?

Position: "Relieved from tax" means that the tax otherwise imposed by Canada is partly or wholly reduced under a provision of the Canada-UK Treaty.

Reasons: Such interpretation is consistent with the object and scheme of the Canada-UK Treaty.

XXXXXXXXXX								2017-072305
K. Patel, CPA, CA
June 1, 2018

Dear XXXXXXXXXX:

Re: Meaning of "Relieved from Tax" in Article 27(2) of the Canada-UK Income Tax Convention (“the Treaty”)

This is in reply to your correspondence where you request our interpretation of the words “relieved from tax” in Article 27(2) of the Treaty. Specifically, in the context of the hypothetical facts noted below, you ask whether the individual in question will be subject to a 25% or 10% rate of withholding tax on royalty payments received.

This technical interpretation provides general comments about the provisions of the Income Tax Act (“the Act”) and the Treaty. 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 a particular transaction 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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Hypothetical facts:

• An individual referred to herein as X is resident in Canada and earns royalties as an author from a Canadian publisher (the “Royalties”).
• X moves to the UK and becomes a non-resident of Canada. X becomes resident but not domiciled in the UK.
• X continues to earn the Royalties while living in the UK.
• X leaves all of the Royalties in a bank account outside the UK, and as a result does not pay UK tax on the Royalties, due to a provision of UK tax law that applies to income earned from outside the UK by a non-domiciled UK resident, where that income is not remitted to the UK.
• The Royalties are subject to a 25% domestic rate of withholding tax under paragraph 212(1)(d) of the Act. Prior to considering the application of Article 27(2) of the Treaty, the conditions of Article 12(2) of the Treaty are met, providing for a 10% reduced rate of withholding.

Question:

Pursuant to the application of Article 27(2) of the Treaty, will X be subject to Canadian withholding tax at a rate of 25% or 10% on the Royalties paid?

Our Comments:

Article 27(2) of the Treaty provides:

Where under any provision of this Convention any income is relieved from tax in a Contracting State and, under the law in force in the other Contracting State a person, in respect of that income, is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Convention in the first-mentioned Contracting State shall apply only to so much of the income as is taxed in the other Contracting State.

In our view, income that is “relieved from tax” in Article 27(2) of the Treaty refers to income that is either partly or wholly relieved from Canadian income tax, pursuant to a provision in the Treaty. Given that Article 12(2) of the Treaty grants X a reduced 10% rate of withholding tax, such income would be considered to be “relieved from tax” in Canada under that Article for the purposes of Article 27(2). Our interpretation of the phrase “relieved from tax” is consistent with the principles of treaty interpretation and is supported by the general purpose of Article 27(2). Since the hypothetical facts note that the Royalty payments will not be remitted to or received in the UK and accordingly are not taxable in the UK, X will not be entitled to the benefits of Article 12(2) of the Treaty and will be subject to a 25% rate of withholding tax under paragraph 212(1)(d) of the Act.

We trust that our comments are of assistance to you.

Yours truly,

Yves Moreno
Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch