7 May 1991 Income Tax Severed Letter - Tax Exemption for Charitable Organization Resident in Japan and Carrying on Charitable Activities in Canada

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 Sirs:

This is in reply to your letter dated January 2, 1990 wherein you requested our opinion regarding the application of Article 22 (Non-Discrimination) of the Canada-Japan Income Tax Convention (1986) (the "Treaty").

XXX

You stated that you will be corresponding with the Japanese tax authorities on this matter and you have requested that Revenue Canada provide you with an opinion as to whether or not receipts earned in canada by a Japanese charitable organization in similar circumstances would be exempt from tax in Canada by virtue of Article 22 of the Treaty.

It was your view that a charitable organization resident in Japan and carrying on charitable activities in Canada should be exempt from Canadian income tax by virtue of Article 22 of the Treaty if a Canadian charitable organization undertaking the same activities in Canada was exempt from Canadian income tax.

It should be noted that Canada has reserved its position on Article 24 (Non-Discrimination) of the OECD Model Double Taxation Convention ("OECD Model"). As a result of that reservation it is the Department's position that paragraph 1 of Article 22 of the Treaty does permit discrimination between residents and non-residents of Canada. In our view such taxpayers would not be considered "in the same circumstances" as is required by that paragraph. However, Canada does not discriminate between non-resident taxpayers from different countries.

Under the Act a non-resident of Canada in receipt of dividends, interest, royalties etc. will be subject to a 25 percent withholding tax on the gross amount of a payment by a resident of Canada. Other types of income arising in Canada and not subject to Part XIII tax will be subject to tax pursuant to section 115 of the Act.

In the absence of specific relieving provisions in a tax treaty for non-resident charities these organizations will be subject to tax in Canada in the same manner as other non-resident taxpayers.

Since the Treaty does not specifically provide any special relief for a Japanese charity with respect to royalty income arising in Canada such charities would only be entitled to the relief provided under specific articles of the Treaty as would other residents of Japan. Accordingly, the reduced rates of tax provided under the Treaty to residents of Japan who are the beneficial owners of dividends, interest or royalties would have application to Japanese charities (i.e. 15 percent on dividends and 10 percent on royalties and interest).

The fact that the Japanese charity may be exempt from Japanese tax on the royalty income by virtue of Japanese domestic law would have no relevance for Canadian tax purposes.

In your factual situation, XXX We are not in a position to comment regarding the possibility of Japanese withholding tax on such royalties since this will depend upon Japanese domestic law. If there is a withholding tax it would, of course, be limited to 10 percent of the gross amount of the royalty payments by virtue of Article 12 of the Treaty.

It is possible that the Japanese authorities may interpret Article 22 of the Treaty differently than Canada because of the manner in which they tax foreign charities under their domestic laws. However it will be necessary, as you suggest, for you to contact the Japanese taxation authorities directly to verify the taxability (or non-taxability) by Japan of royalties received by a Canadian charity on tour in Japan.

We would only note that, regarding Article 24 of the OECD Model, Japan reserved the right not to extend to the permanent establishments of non-residents the benefit of tax incentive measures introduced for national policy objectives. No other reservations were expressed by Japan on Article 24 of the OECD Model.

We trust the foregoing is of assistance.