16 June 1987 Income Tax Severed Letter 5-3282 - [ Technical Interpretation requested concerning certain provisions of the Income Tax Act (the "Act") and the Canada United Kingdom Income Tax Convention (1978) (the "Convention")]

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.

June 16, 1987

A.A. Cameron (613) 957-2121

Re: Technical Interpretation requested concerning certain provisions of the Income Tax Act (the "Act") and the Canada United Kingdom Income Tax Convention (1978) (the "Convention")

We are writing in response to your letter of April 22, 1997 in which you requested a technical interpretation with respect to the interaction of subsection 250(5) of the Act and Article IV of the Convention in the following hypothetical situation:

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

Since its incorporation, Canco's "central mind and management" has been located in the United Kingdom (the "U.K.") such that the corporation will be considered to be resident in the U.K. for U.K. tax purposes.

Canco does not have a "permanent establishment" in Canada, as that term is defined in Article 5 of the Convention.

With regard to this hypothetical situation you have asked whether we would concur with the following interpretations which you have detailed in your above-mentioned letter:

1. Paragraph 1 of Article 23 of the Convention 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". In your view, a request for the determination of residence under Article 4 of the Convention 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 should determine that for the purposes of the Convention, Canco is a resident of the U.K. and not of Canada, then in your opinion subsection 250(5) of the Act would apply to deem Canco not to be resident in Canada (i.e. its provisions will override the provisions of subsection 250(4) of the Act).

3. It is your view that a determination by competent authorities may take years to resolve and that:

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

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

(c) If subsection 250(5) of the Act does not apply retroactively, section 88.1 thereof would thereby apply.

We will provide our comments on your interpretations in the same order in which those interpretations appear above:

1. In our opinion the first paragraph of Article XXIII of the Convention would simply provide Canco with the discretionary right to bring certain situations it considers has resulted or will result for it in taxation which is not in accordance with the Convention to the attention of the competent authority of the Contracting State of which it is a resident. The provisions of paragraph 3 of Article IV of the Convention, along with the provisions of paragraph 3 of Article XXIII thereof, would in our opinion allow the competent authorities of Canada and the U.K. to consider the question of residency under the Convention without the necessity for a referral by a third party. In most cases, however, questions of residency involving a specific corporation otherwise resident for the purposes of the Convention in both Contracting States due to the provisions of paragraph 1 of Article IV of the Convention would be raised by that corporation as it would likely be enduring double taxation.

2. If by mutual agreement, as provided for in the Convention, the competent authorities of Canada and the U.K. determined that Canco should be considered, under the Convention, to be a resident of the U.K. and not of Canada such that Canco would not be subject to tax under Part I of the Act on its income from a source outside Canada, then in our opinion the provisions of subsection 230(5) of the Act would operate to deem Canco not to be resident in Canada notwithstanding the provisions of subsection 250(4) of the Act.

3(a) We agree with your view that during any "interim period" during which the competent authorities of Canada and the U.K. endeavoured to settle the question of residency, Canco would be required to file corporate income tax returns under Part I of the Act reporting its "world" income.

(b) In our opinion, if a determination is made as described in our comments under 2 above such that the provisions of subsection 250(5) of the Act apply to Canco, those provisions would apply at the earliest time on the effective date specified in such determination (if a specific time of day was not referred to therein). This effective date would be determined through the mutual agreement process and would not necessarily be Canco's date of incorporation, especially if several years had passed such that certain of Canco's taxation years would be statute-barred under the Act since Canada's position is that any relief given following a mutual agreement process should be tied to the time limits contained in the Act. (As evidenced by Canada's reservation of its position on the second sentence of paragraph 2 of Article 25 of the "Model Double Taxation Convention on Income and on Capital" published by the Organization for Economic Co-operation and Development).

(c) If the effective date of a determination made as described in our comments under 2 above was subsequent to the date of incorporation of Canco, we would agree that the provisions of section 88.1 of the Act would apply to Canco as a result of such determination and the application of the provisions of subsection 250(5) of the Act. We hope our comments will be of assistance to you.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch