17 May 1988 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.

May 17, 1988

Mr. E.E. Campbell Provincial & International Relations Legislative & Intergovernmental Affairs Branch Revenue Canada Taxation 875 Heron Road Ottawa, Ontario K1A 0L8

Dear Mr. Campbell:

Canada-Brazil Income Tax Convention

As requested, I would appreciate it if you could provide me with a technical interpretation concerning Articles 10 & 22 of the Canada- Brazil Income Tax Convention (the "Treaty").

Article 10 - Dividends

Article 10 of the Treaty states that where a company "holds an equity percentage of at least 10% in the company paying the dividends, the tax so charged shall not exceed 1.5% of the gross amount of the dividends". The term equity percentage is not defined in the Treaty. Accordingly, pursuant to Article 3, paragraph 2, the laws of Canada are to be used in defining this term, if the company paying the dividends is a Canadian resident.

Paragraphs 95(4)(a) and (b) of the Canadian Income Tax Act (the "Act") basically define a 10% equity percentage to include holding 10% of the issued shares of a class for purposes of the foreign affiliate rules, i.e., it is not necessary to hold 10% of the total capital of a company in order to have an equity percentage of 10%.

I would appreciate it if you would confirm that this definition of equity percentage will be relevant in determining the withholding tax rate on a dividend paid by a Canadian company to a Brazilian corporate shareholder. Accordingly, where that shareholder holds 10% of the issued shares of a class, but less than 10% of the total capital of the company, please confirm that the Canadian withholding tax rate on dividends paid to that shareholder would be 15%.

I would also appreciate it if you could confirm whether or not your files contain any indications as to how the Brazilian tax authorities would interpret "equity percentage" and if so, what those indications are.

Article 22 - Elimination of Double Taxation

Article 22, paragraph 4 of the Treaty states that:

"Dividends received by a company which is a resident of Canada from a company which is a resident of Brazil shall be exempt from tax in Canada if the company receiving the dividends holds an equity percentage of at least 10 per cent in the company paying the dividends and if the profits out of which the dividends are paid are derived from carrying on an active business in Brazil or in a country with which Canada has concluded a double taxation convention."

Please confirm that the definition of equity percentage as contained in Paragraphs 95(4)(a) & (b) of the Act would apply, and that no Canadian income tax under any part of the Act would apply to the dividends described, if the Canadian corporate shareholder owns at least 10% of the issued shares of a class, and the dividends are paid out of active business earnings.

Thank you for your attention to these matters.

Yours very truly, XXXX