11 July 1985 Income Tax Severed Letter

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.

July 11, 1985

K.B. Harding

XXXX

This is in reply to your letter of June 6, 1985, concerning the treatment of income received from the United States by an individual who is considered to be a resident of both Canada and the United Kingdom but for treaty purposes is deemed to be a resident of the United Kingdom.

We are not entirely convinced that in the hypothetical situation set out in your letter that the individual would be a resident of the United Kingdom for purposes of Article IV of the Canada-United Kingdom Tax Convention (Convention). However, we will reply to your question on the assumption that the individual is considered a resident of the United Kingdom.

We have reviewed the terms of the Convention and it is our view that there is nothing in the Convention which restricts Canada's right to tax an individual, who is resident in both Canada and the United Kingdom, but for purposes of the treaty is deemed to be resident of the United Kingdom, on income received from a third country. Where Canada taxes such an individual, Section 126 permits us to provide a foreign tax credit only for taxes paid in the United States and nothing for taxes paid in the United Kingdom since the income is sourced in the United States. Accordingly, this would produce an element of double taxation and the taxpayer would have the right to apply to the competent authority pursuant to Article XXIII of the Convention.

In view of the fact that the Convention is silent on the treatment of income received from a third country (i.e., no other income article), we will contact the United Kingdom competent authority with the view of resolving this problem.

You provided an argument that under the Canada-United States Income Tax Convention it would appear that Article VII would resolve this problem by ensuring that such income would only be taxable in the country where the individual is deemed to be a resident pursuant to Article IV of the Canada-United States Income Tax Convention.

Paragraph 3 of the commentary on Article 21 of the OECD model states "...when income arises in a third State and the recipient of this income is considered as a resident by both Contracting States under their domestic law, the application of Article 4 will result in the recipient being treated as a resident of one Contracting State only and being liable to comprehensive taxation ("full tax liability") in that State only." Since the Canada-United States Income Tax Convention is modelled on the OECD model, we confirm the argument expressed in your letter.

We will be in contact with you after we have discussed this matter with the United Kingdom.

Yours sincerely,

Director Provincial and International Relations Division

c.c.: Mr. R.A. Short KBH/jb