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.
Subject: XXX Tax Sparing Canada and Brazil Income Tax Convention
We are writing in response to your memorandum of January 11, 1991 with which you enclosed a copy of a submission made by XXX
The position being advanced by XXX is based upon a strict and literal reading of the words of the convention and, in particular, paragraph 6 of Article 11 which provides that the "limitation established in paragraph 2 shall not apply to interest arising in a Contracting State and paid to a permanent establishment of an enterprise of the other Contracting State which is situated in a third State." This "limitation" in paragraph 2 provides for a reduced rate of withholding tax in those cases in which the recipient of the interest is a "company" (as that term is defined in Article 3 of the Convention). Accordingly, XXX maintains that, notwithstanding that paragraph 6 prevents the XXX from availing itself of the reduced rate of withholding tax pursuant to the Convention, the interest is, nevertheless, subject to Brazilian taxation under paragraph 2 and therefore, paragraph 3 of Article 22 will have application.
If the interpretation of XXX is accepted, the result to an individual who had paid withholding tax at the rate of 25% is that the individual would be considered to have paid only 20% for purposes of a Canadian tax credit. This would obviously be a result which was neither contemplated nor intended to result from the tax sparing provision.
It is our opinion that the particular provisions must be read in their context and interpreted with due consideration given to the purpose of both the provision and the treaty as a whole. In the case of the Canada-Brazil convention, it is our view the paragraph 3 of Article 22 is intended to provide tax sparing relief only in respect of interest income which has been taxed in Brazil at the reduced rates provided in paragraph 2 of Article 11 of the convention.
Accordingly, it remains our opinion, as stated previously, that the Department is justified XXX
We trust that our comments are of assistance to you.
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