9 July 1979 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.

XXXX

July 9, 1979

Mr. R. D. Weil, Non-Corporate Rulings Division, Section 4, Revenue Canada, Taxation, 875 Heron Road, Ottawa, Ontario. K1A 0L8

Re: Non-resident Tax Canadian testamentary trust Our File 31593

Dear Mr. Weil:

Thank you for your letter of April 5th. Due to my principal and I being out of town at varying times there has been delay in my replying to you.

In your letter you state that the proceeds of a sale by the U.K. resident of the income interest in the testamentary trust is taxable in Canada, but you do not state at what rate. I assume that the rate you have in mind would be the regular 15% rate for residents of the U.K. and ask you to please confirm.

I have studied the problems in greater detail in the light of your letter and I disagree with your conclusions.

The Canada-United Kingdom Income Tax Agreement Act 1967 clearly states that in the event of any inconsistency between the Income Tax Act and the provisions of the Agreement the provisions of the Agreement prevail.

The Agreement clearly states in Article 12 that "gains from the alienation of any property" (except immovable property and movable business property of a permanent establishment) shall be taxable only in the territory of which the alienator is a resident - in this case the United Kingdom.

There are three key words in the above phrase, namely gain, alienation and property.

There can be no question but that "property" includes an income interest in a trust.

There can also be no question but that "alienation" is any transfer of ownership and includes an assignment of an income interest in a trust.

The model form for International Tax Treaties also includes the same words "gains from the alienation of any property". The commentary on these words in Stikeman's Canadian Tax Letter of October 31, 1978 states that the words "alienation of property" are used to cover . . . the sale of a right".

I have had a study made as to the meaning of the word "gain" which discloses the following.

Butterworth's Words and Phrases at pages 307/8 discloses that both in England and Canada the courts have held that "gain" is not limited to pecuniary gain or confined to profits - it is something obtained or acquired. Dictionary definitions also confirm this - see

Funk & Wagnells                -                 that which is obtained as an advantage; 
                             -                  a desired acquisition;

Shorter Oxford                 -                  increase, of possessions, resources, or 
                                                  advantages, consequent on some action or event; 
                              -                  the action of acquiring;

Concise Oxford                 -                 increase of possessions; 
                               -                 acquisition of wealth.

I also point out that the corresponding section in the Canada- United States Tax Convention uses the wording "gains derived in one of the contracting States from the sale or exchange of capital assets . . .". As that Convention and the U.K. Agreement are both Statutes of Canada it is clear that Parliament did not limit the provisions in the U.K. Agreement to sales or exchanges of capital assets but extended it to any form of alienation of any form of property.

Accordingly it is not necessary to determine whether or not proceeds of sale of an income interest in a trust is a capital or income receipt although I submit that it is a capital receipt as stated in Simon's Income Tax (Volume 1 (London 1948).

Accordingly I submit that Article 12 of the 1967 U.K. Agreement, now Article XIII of the 1978 Convention, clearly provides that the proceeds of a disposition of an income interest in a trust shall be taxable only in the territory of which the alienator is a resident - i.e., in this case the United Kingdom.

The Canadian Parliament cannot unilaterally change the Treaty by a provision in the Income Tax Act and in fact did not attempt to do so as the Canada-United Kingdom Income Tax Agreement Act, 1967 (Chapter 75, 1966-67, Part IV) expressly provides "(2) In the event of any inconsistency between the provisions of this Part, or the Agreement, and the operation of any other law, the provisions of this Part and the Agreement prevail to the extent of the inconsistency."

Yours sincerely,

XXXX