22 April 1987 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.

April 22, 1987

Revenue Canada, Taxation Technical Interpretations 875 Heron Road Ottawa, Ontario K1A 0L8

Dear Sirs:

We hereby request a technical interpretation with respect to the interaction of subsection 250(5) of the Income Tax Act ("the Act") and Article 4 (i.e. Fiscal Domicile) of the Canada-U.K. Tax Convention ("the Treaty").

Facts

1. Canco, is a corporation incorporated in Canada after May 9, 1985. As such, subsection 250(4) will deem the corporation to be a resident of Canada for Canadian tax purposes.

2. Since its incorporation, Canco's "central mind and management" has been located in the United Kingdom. As such, the corporation will be a resident of the U.K. for U.K. tax purposes.

3. Canco does not have a permanent establishment in Canada, as defined in Article 5 of the Treaty.

Analysis

Pursuant to paragraph 3 of Article 4 of the Treaty, where a corporation "is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person".

Paragraph 1 of Article 23 of the Treaty (i.e. Mutual Agreement Procedure), states further that "Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, without prejudice to the remedies by the national laws of those States, address to the competent authority of the Contracting State of which he is a resident an application in writing stating the grounds for claiming the revision of such taxation". Paragraph 2 then goes on to state that "The competent authority referred to in paragraph 1 shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation not in accordance with the Convention".

Articles VI, VII and XIII of the Treaty generally provide that residents of one Contracting State will not be taxed on income by the other Contracting State unless the income arises in the other Contracting State.

Subsection 250(5) of the Act will override the application of subsection 250(4), if, by virtue of an agreement or convention between the government of Canada and the government of another country that has the force of law in Canada, the corporation would at that time, if it had income from a source outside Canada, not be subject to tax on that income under Part I.

Interpretation Requested

Please advise whether the Department of National Revenue concurs with the following interpretations:

1. Paragraph 1 of Article 23 of the Treaty, states that Canco "may ... address to the competent authority of the Contracting State of which he is a resident an application in writing stating the grounds for claiming the revision of such taxation". Accordingly, it appears that a request for the determination of residence under Article 4 of the Treaty can only be initiated at Canco's request, and as such, the competent authorities of either Canada or the U.K. cannot make a determination of residence solely at their own initiative.

2. If and when the competent authorities determine that Canco is a resident of the U.K. and not of Canada, then subsection 250(5) would apply to deem Canco not to be resident in Canada (i.e. will override subsection 250(4)).

3. As a determination by competent authorities may take years to resolve:

(a) during that interim period Canco will be required to file Canadian corporate tax returns under the Act.

(b) If and when the competent authorities determine that Canco is a resident of the U.K. and not of Canada, the application of subsection 250(5) will apply retroactively from Canco's date of incorporation, versus from the date of determination.

(c) If subsection 250(5) does dot apply retroactively, section 88.1 would thereby apply.

Very truly yours,

XXXX