18 February 1998 Income Tax Severed Letter 9802205 - Canada-United Kingdom treaty

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.

SUMMARY: Canada - United Kingdom treaty—ITUK-Art. VI—Whether Article VI of the Canada-United Kingdom Income Tax Convention denies Canada the right to tax rental income earned by a Canadian resident from United Kingdom real property.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUES:

whether Article VI of Canada - UK treaty denies Canada the right to tax rental income derived by a Canadian resident from UK real property

POSITION:

No

REASONS:

article does not state that such income "shall be taxed only in" the UK

T. Harris XXXXXXXXXX 5-980220

February 18, 1998

Dear Sir:

Re: Article VI of the Canada - United Kingdom Income Tax Convention

This is in response to your letter of January 29, 1998 wherein you requested our interpretation of the application of Article VI of the Canada - United Kingdom Income Tax Convention (the "Convention") to a situation where a resident of Canada owns real property situated in the United Kingdom from which the Canadian resident derives rental income. It is your interpretation that pursuant to Article VI of the Convention, this rental income may be subject to tax in the U.K. but not in Canada. In this regard, you point out that unlike the articles dealing with interest, dividends and royalties, Article VI does not explicitly give Canada the right to tax U.K. source rental income derived by a Canadian resident.

Our Comments

Under Canada's system of international tax treaties Canada has retained the right to tax any income which is covered by such treaties unless Canada has specifically given up the right to tax such income. See for example, Article VIII of the Convention which provides that profits from the operation of ships or aircraft in international traffic are only taxable in the country of residence. Under Canada's tax treaties an exclusive right to tax has generally only been granted to the country of residence. Consequently, Canada has generally retained the right to tax any income earned by a Canadian resident.

Article VI of the Convention would, therefore, not apply to deny Canada the right to tax a Canadian resident with respect to any income derived from real property situated in the U.K. Although Article VI may not explicitly give Canada the right to tax U.K. source rental income derived by a Canadian resident, it does not deny Canada the right to tax such income. It is only in situations where the Convention provides that a specific type of income "shall be taxed only" in one of the contracting states which would give an exclusive right to tax to that contracting state. However, to eliminate the effects of double taxation of U.K. source rental income, the Canadian resident would, within the limitations set out in subsection 126(1) of the Act, be entitled to a foreign non-business income tax credit with respect to any U.K. tax which is paid on such income.

We trust that our comments will be of assistance.

Yours truly,

for Director Reorganizations and International Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch