7 April 1983 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.

K.B. Harding

April 7, 1983

Dear Sirs:

This is in reply to your letter of December 24, 1982, concerning the tax treatment of a capital gain realized by a resident of Australia on the disposition to a nonresident of Canada of shares of a private corporation incorporated in Canada.

We have reviewed the problem outlined in your letter and offer the following comments.

It is our view that it is arguable that the term "income" used in Article 21 of the Canada-Australia Income Tax Convention (1980) does not include capital gains since the Convention mentions gains specifically where it is intended that these be included.

However, we do not agree that the Convention only permits the taxation of the capital gains mentioned in Article 13 and protects Australian residents from Canadian taxation on other capital gains. It is our view that because the Convention makes no mention of capital gains arising on the disposition of property other than property mentioned in Article 13, Canada's right to tax those types of capital gains has remained intact for it is in no way limited by the terms of the Convention.

In addition, there arises no inconsistency between the provisions of the Income Tax Act and the Convention which would cause the Convention to prevail pursuant to subsection 6(2) of the Canada-Australia Income Tax Convention Act, 1980, so as to limit Canada's right to tax the capital gains in question. We are also of the view that the taxation of these gains does not go contrary to the purpose of the Convention which is to eliminate double taxation since these gains are not taxable in Australia.

This interpretation does not mean that Article 13 is merely excess verbiage, as suggested in the article in the 1981 Canadian Tax Journal. It would appear that the purpose of Article 13 is merely to limit Canada's right to tax income or gains on the alienation of real property to situations where the property is located in Canada. Without Article 13 capital gains could be taxed in Canada even if the property was located outside Canada.

In summary, we are of the view that under the Convention with Australia, Canada has not given up its right to tax capital gains.

Yours sincerely,

Director Provincial and International Relations Division KBH/jb