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.
Dear XXX
This is in reply to your letter of December 29 concerning the Canada-Australia Income Tax Convention (1980) (the Convention) which has yet to be ratified.
You describe a situation wherein Mr. and Mrs. X residents of Australia, own 50% of the outstanding shares of a private taxable Canadian corporation which is engaged in an XXX. The shares are to be considered capital property to Mr. and Mrs. X for the purposes of your enquiry. A gain is anticipated if the shares are sold.
We agree that in the absence of the effect of a tax convention, subsection 2(3) of the Income Tax Act would apply and tax would be payable by Mr. and Mrs. X on their taxable income earned in Canada as determined in accordance with section 115 of the Act. Paragraph 115(1)(b) of the Act would require them to include their taxable capital gains from the disposition of the shares in arriving at their taxable income.
We have perused the Convention and there is no specific Article dealing with the alienation of capital property you have described. Accordingly, Article 21 of the Convention would apply. Paragraph 2 of Article 21 would only have application if the gain is derived from sources in Canada. Paragraphs 2 and 3 of Interpretation Bulletin IT-395 outlines the Department's views on the source of a capital gain. Paragraph 1 of Article 21 would apply if the gain is not derived from sources in Canada.
We agree with your understanding that, for an Australian resident shareholder (who neither carries on business through a permanent establishment situated in Canada nor performs professional services from a fixed base in Canada) paragraph 2 of Article 10 of the Convention limits the Canadian tax imposed on dividends to a rate not exceeding 15% of the gross amount of the dividend. The limitation applies not only to dividends actually paid, but also to dividends deemed to have been paid by the operation of sections 84 or 212.1 of the Income Tax Act.
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© Sa Majesté la Reine du Chef du Canada, 1981
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