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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Would the disposition of an option to acquire land in Ontario by a U.K. resident subject to tax in Canada?
Position: Yes.
Reasons: Paragraph 1 to 3 of Article 6 of the Canada-United Kingdom Income Tax Convention would apply.
XXXXXXXXXX 2003-002815
S. Leung
November 24, 2003
Dear XXXXXXXXXX:
Re: The Canada-United Kingdom Income Tax Convention (the "Convention")
We are writing in reply to your letter of July 3, 2003 in which you requested our view whether your interpretation of the provisions of the Convention is correct with respect to the facts of the following situation.
The situation
1. A company ("UKCo") registered and resident in the United Kingdom ("U.K.") with its main business activity in property dealing and development acquired an option to purchase land in Canada (the "Option") from an unrelated third party, with a view to sell the Option to another unrelated third party for a profit prior to its expiration.
2. The Option does not include any right or privilege to explore for, drill for, or take petroleum, natural gas or other related hydrocarbons situated in Canada.
3. The Option will not be recorded at any land registry in Canada nor will it be secured against any land in Canada.
4. Buying and selling options on real property is part of the business carried on by UKCo. UKCo is a trader and does not purchase for long-term investment purposes.
5. UKCo has no place of business or employees in Canada.
Your interpretation
a) As UKCo does not have a place of business or employees in Canada, it does not have a permanent establishment (as defined in Article 5 of the Convention) in Canada.
b) The disposition of the Option by UKCo will not be regarded as the alienation of immovable property under Article 13 of the Convention. The Option does not include any right or privilege to explore for, drill for, or take petroleum, natural gas or other related hydrocarbons situated in Canada.
c) In the absence of any permanent establishment in Canada, any profits of UKCo from the business of buying and selling options is not taxable in Canada by virtue of Article 7 of the Convention.
d) The Option (and UKCo's interest therein) does not constitute immovable property as defined in paragraph 2 of Article 6 of the Convention. This is because the Option does not represent an interest in land and the terms of the option contract are governed by the general law of contract, not land law.
The situation outlined in your letter appears to relate to an actual situation involving an identifiable taxpayer. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.
As you are aware, any business profits made on the disposition of the Option by UKCo will be included in the computation of UKCo's "taxable income earned in Canada" pursuant to the extended meaning of "carrying on business in Canada" under subparagraph 253(c)(iii) of the Income Tax Act (the "Act") and subparagraph 115(1)(a)(ii) of the Act. Accordingly, the subject matter of this letter is to discuss whether the Convention denies Canada the right to tax such profits.
It is a question of fact whether or not UKCo has a permanent establishment in Canada through which it carries on business. From the limited information you provided which is outlined above, it appears that UKCo does not carry on business through a permanent establishment in Canada if it has no fixed place of business in Canada nor employees in Canada who have the authority to conclude contracts in the name of UKCo. However, pursuant to paragraph 7 of Article 7 of the Convention, "Where profits include items of income which are dealt with separately in other Articles of this Convention, the provisions of this Article shall not prevent the application of the provisions of those other Articles with respect to the taxation of such items of income". Accordingly, regardless that UKCo does not have a permanent establishment in Canada, in our opinion, paragraphs 1 and 3 of Article 6 of the Convention apply in this case and would maintain Canada's right to tax the business profits arising on the disposition of the Option.
Paragraphs 1 to 3 of Article 6 of the Convention read as follows:
"1. Income from immovable property, including income from agriculture or forestry, may be taxed in the Contracting State in which such property is situated.
2. For the purposes of this Convention, the term "immovable property" shall be defined in accordance with the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.
3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property and to profits from the alienation of such property." (Underlines added)
Pursuant to paragraph 2 of Article 6, "immovable property" includes "rights to which the provisions of general law respecting landed property apply". In our opinion, the Option would fit within that definition. For example, assuming the land upon which the Option was granted is situated in Ontario. Under each of the Land Titles Act and the Land Registration Reform Act of Ontario, the word "land" means land, tenements, hereditaments and appurtenances and any interest therein. Under the Land Transfer Tax Act of Ontario, "land" includes lands, tenements and hereditaments and any estate, right or interest therein, a structure to be constructed on land as part of an arrangement relating to a conveyance of land, a leasehold interest or estate, the interest of an optionee, the interest of a purchaser under an agreement to sell land, or goodwill attributable to the location of land or to the existence thereon of any building or fixture, and fixtures. Furthermore, it has generally been the position of the Canada Customs and Revenue Agency (the "CCRA") that the granting of an option in respect of real property vests in an optionee an interest in the subject land.
In addition, as an alternative argument, we refer you to the opening sentence of paragraph 2 of Article 6 of the Convention, which reads "For the purposes of the Convention, the term "immovable property" shall be defined in accordance with the law of the Contracting State in which the property in question is situated". In light of paragraph (l) of the definition of "taxable Canadian property" in subsection 248(1) of the Act and subparagraph 253(c)(iii) of the Act (i.e., both provisions, in substance, extend the meaning of "real property situated in Canada" to include "an interest therein or an option in respect thereof"), we are of the view that, for purposes of the meaning of the term "immovable property" in the Convention, the tax laws of Canada have extended the meaning of "immovable property" to include an interest in or an option in respect of real property. As such, Article 6 of the Convention would be applicable.
We trust you will find the above to be of assistance.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the CCRA.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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