Article 24 - Double Taxation

France started imposing income tax on rental income as it was earned rather than the tax being payable one year in arrears, as previously. However, the taxpayer (a Canadian resident with a French rental property), like others, was granted transitional relief so that in 2019 she received a tax credit from the French government equal to the French tax otherwise payable by her on her 2018 income – so that in 2019 she only had to pay the current tax on her 2019 rental income.

She nonetheless argued in Tax Court that she should be entitled to a foreign tax credit (“FTC”) for French income tax on the rental income for her 2018 taxation year (which clearly was subject to Canadian income tax) on the grounds that she was continuing throughout to pay French income tax on an annual basis.

In finding that no relief was available under Art. 23 of the Treaty, Lafleur J stated, after summarizing Art. 23 (paras. 36, 40, TaxInterpretations):

The text of this provision is clear: double taxation is to be avoided where the same income is taxed in both contracting states. The Tax Convention refers to income, regardless of when the tax is to be paid to or collected by the tax authorities. …

Thus, since Mr. Marin did not pay tax to the French state on 2018 income, he cannot invoke the Tax Treaty to relieve Canadian taxation of 2018 income, given the absence of double taxation of his 2018 income.

A US company (“GEFI Inc.”) and UK company (“GEFI”) in the GE group formed a Delaware LP (the “LP”) with GEFI Inc. as the 1% general partner and GEFI as the 99% limited partner, LP made five intercompany loans and also received some loans from its partners as capital contributions.

After finding that US taxes payable by GEFI (by virtue of it being deemed to be a US resident under the Code as a result of its stock being stapled with that of GEFI Inc.) were not imposable in accordance with the UK-US Treaty given that GEFI, through its participation in the LP, did not have a permanent establishment in the US, Brooks J went on to indicate, in obiter, that if such taxes had instead been imposed in accordance with Art. 5, then the UK would have been required to accord a foreign tax credit to GEFI in accordance with Art. 24 of the Treaty (similar to Art. 24 of the Canada-UK Treaty).

A resident of both Canada and the UK who was employed full-time in the UK for several years was not entitled to claim a foreign tax credit under s. 126(1) for mandatory contributions that he made in 2016 to the UK’s national insurance scheme, on the basis that such contributions were not foreign income “taxes”. Bocock J also found that the taxpayer was not entitled to relief against double taxation under the Canada-UK Income Tax Convention, stating (at para 14):

… Because the amount has not yet been subject to tax in the UK (because it has been deducted from income before calculating income tax) there is no requirement under the Convention or section 126 of the Act to provide relief in Canada. When Mr. Zong ultimately receives his pension in the UK, it may be subject to UK income tax and he may be eligible for relief in Canada through the FTC at such time, but not now. …

An Australian-resident individual was taxed at the 15% long-term U.S. capital gains rate on his gains on the disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it. The Australian foreign tax credit (FITO) provision provided a credit for foreign income tax “if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.” The Commissioner successfully took the position that as only half of the U.S. gain had been included in the individual’s income, he was entitled to the FITO for only half of the U.S. tax.

Art. 22(2) of the Australia-U.S. Convention provided:

… United States tax paid under the law of the United States and in accordance with this Convention … in respect of income derived from sources in the United States by …a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. … Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.

In concurring with Steward J that the Commissioner’s approach accorded with Art. 22(2), Jackson J stated (at paras. 166, 168-169):

The general principle expressed in the first sentence of Art 22(2) is that if a person who is an Australian resident for the purposes of Australian taxation law pays United States tax in respect of income (including a gain) derived from sources in the United States, the Australian government must allow a credit against Australian tax payable in respect of that income. …

The requirement that the amount of income be the same in the case of each of the United States tax paid and the Australian tax payable emerges from the syntax of Art 22(2). But it does not follow that this amount of income must be all the income derived from a given source in the United States that is also subject to taxation in Australia. The term that is used to indicate a connection between the relevant amount of income, whatever that may be, and each of the United States tax and the Australian tax is 'in respect of'. That is indeterminate. No doubt, in each case the connection cannot be a distant, arbitrary or illogical one. But to the extent that it is necessary to identify the connection more precisely, that must be done in accordance with the provisions of the law of Australia. That is what the third sentence of Art 22(2) requires.

In considering the present case, it does not stretch the language of the article to read 'Australian tax payable in respect of the income' as referring to capital gains tax payable in Australia on assessable income being an amount equal to only 50% of the gain. So reading 'the income' as referring to 50% of the gain derived in the United States is consistent with the general principle in the first sentence of Art 22(2) (acknowledging there will also be differences, such as treatment of capital losses, in the way the laws of different countries calculate the gain).

An Australian-resident individual was taxed at the 15% long-term U.S. capital gains rate on his gains on the disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it. The Australian foreign tax credit (FITO) provision provided a credit for foreign income tax “if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.” The Commissioner successfully took the position that as only half of the U.S. gain had been included in the individual’s income, he was entitled to the FITO for only half of the U.S. tax.

Art. 22(2) of the Australia-U.S. Convention provided:

… United States tax paid under the law of the United States and in accordance with this Convention … in respect of income derived from sources in the United States by …a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. … Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.

In rejecting a submission that Art. 22(2) required Australia to grant an undiscounted FITO, McKerracher J stated (at paras. 126-127):

Under Australian law, the only income forming part of the assessable income is 50% of the capital gain on which tax is paid in the US. Where Art 22(2) refers to Australian tax payable in respect of income, the income is only 50% of the capital gain.

Secondly, the word ‘all’ does not appear before the words ‘United States tax paid’ in the first line of Art 22(2). The Article does not suggest that a credit is allowed against Australian tax payable for the whole amount of the US tax paid. … It does not prescribe how much is to be allowed as a credit. The credit is subject to the provisions and limitations of Australian law.

In Tech Mahindra, computer services provided by employees of the taxpayer located in India to Australian companies were found to be royalties under the Australia-India Treaty, and Australia was found to have the right to tax those payments under Art. 12(2) of the Treaty.

At issue here was whether this meant that the payments had an Australian source by virtue of Article 23(1) of the Treaty, so that they were taxable as Australian source income under s. 6-5(3)(a) of the Income Tax Assessment Act 1997 (which provided that the assessable income of a foreign resident included “the ordinary income you derived directly or indirectly from all Australian sources during the income year”) and Art. 23(1), which provided:

Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.

In finding that Art. 23(1) had such effect, the Court stated (at para. 15):

The effect of Article 23 … is that the payments in question are deemed to have an Australian source for the purposes of s 6-5(3)(a).

And at para. 26:

The applicant also placed store on the generalised principle that tax treaties are, and can only be, exclusively relieving: that is, they are only ever “shields not swords” and not the grant of a standalone taxing power and independent imposition of taxation. The Commissioner did not cavil with the proposition that tax treaties do not grant a standalone taxing power or the independent imposition of taxation (see Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) (2015) 102 ATR 13; [2015] FCA 1092 and the cases cited at [50]–[52]) or that the allocation of the tax rights they effect is permissive. They do not oblige the contracting states to tax: Federal Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 (“Lamesa”) at 600-601; GE Capital at [36]. However none of these generalisations establish the proposition that Article 23 does not operate according to its terms.

As a result of having a 30% interest between 2005 and 2009 in four companies which were resident in China, the taxpayer had the active business income of those companies of $4.6 million attributed to her in New Zealand under the New Zealand controlled foreign companies (CFC) regime. The New Zealand income tax payable by her on that income was reduced by the Chinese tax actually paid by those companies, but not by approximately $0.6 million of tax that the Chinese companies were spared from paying due to tax concessions granted to them under Chinese domestic law. Art. 23 of the China- New Zealand Double Taxation Agreement (the “DTA”) provided in relevant part:

2. In the case of New Zealand, double taxation shall be avoided as follows:

(a) … Chinese tax paid under the laws of the People’s Republic of China and consistently with this Agreement, whether directly or by deduction, in respect of income derived by a resident of New Zealand from sources in the People’s Republic of China (excluding, in the case of a dividend, tax paid in respect of the profits out of which the dividend is paid) shall be allowed as a credit against New Zealand tax payable in respect of that income; …

3. For the purposes of paragraph 2 (a), tax payable in the People’s Republic of China by a resident of New Zealand shall be deemed to include any amount which would have been payable as Chinese tax for any year but for an exemption from, or reduction of tax granted for that year or any part thereof under any of the following provisions of Chinese law … .

In finding that Art. 23 did not require the Commissioner to grant a foreign tax credit for the spared Chinese tax, Harrison J stated (at paras. 29-30, 33):

The phrase “in respect of” is amorphous and can lead to linguistic uncertainty and confusion. …

We are satisfied that the phrase “in respect of” is used synonymously with “on” in all three places in art 23(2)(a). Its meaning should be consistent throughout. Contrary to the Judge’s view, we are satisfied that art 23(2)(a) requires the tax to have been paid by a New Zealand resident on income derived by him or her in China, not by a third party CFC; that is the essential precondition to a credit in New Zealand. …

In our judgment art 23(2)(a) relieves solely against juridical double taxation. Mr Clews’s argument [for the taxpayer] requires us to disregard the legal nature of the relationship between Ms Lin and the Chinese CFCs to focus instead on the substantive source of “the income derived”. The fact that the ultimate source is income attributed to Ms Lin from the Chinese CFCs does not justify treating the two income streams, earned separately by the CFCs and Ms Lin, as one for revenue purposes, and ignoring the plain foundation of art 23(2)(a) on the source of “the income derived by a resident of New Zealand”, Ms Lin.

A Canadian-resident individual and U.S. citizen was subject to US. income tax of 15% on a distribution to her out of her IRA. However, she filed her U.S. income tax return on the specious basis that the U.S. tax on the distribution was eliminated by a U.S. foreign tax credit based on Art. XXIV, para. 6 of the Canada-U.S. Treaty, and the IRS accepted the return.

Before concluding that that, as no U.S. tax was “ultimately imposed” on the taxpayer, no Canadian foreign tax credit was available, Lamarre ACJ stated (at para. 14), having regard to Art. XXIV of the Canada-U.S. Treaty:

[W]hen a U.S. citizen who is also resident in Canada earns pension income the source of which is in the United States, under the treaty the United States is allowed to tax the first 15% of that income, and the excess is taxable in Canada. This is why, to avoid double taxation, a taxpayer is allowed, in computing the Canadian tax, to claim a foreign tax credit for the 15% tax paid in the United States, and that taxpayer is entitled to a foreign tax credit against his U.S. tax for the tax paid in Canada over and above 15%.

The Crown brought a motion under Rule 58(1) for determination of questions of law respecting the application of Art. XXII(2) of the Canada-Brazil Treaty to the assumed situation of a Canadian resident taxpayer (who earns income from other sources that is taxable in Canada) earning bond interest arising in Brazil which is taxed in Brazil under Art. XI of the Treaty and with the taxpayer being deemed by Art. XXII(3) to have paid Brazilian tax equal to 20% of the gross bond interest arising in Brazil. The Crown position was that the maximum foreign tax credit available to the taxpayer under Art. XXII(2) was equal to the actual Canadian tax payable on the bond income arising in Brazil, which in its view must take into account applicable expenses incurred by the taxpayer to earn the income. The taxpayer’s position was that such maximum credit equalled the Canadian tax rate multiplied by the gross amount of the interest. Art. XXII(2) provided:

The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.

In accepting the Crown’s interpretation, Paris J stated (at paras. 29, 51, 62):

[T]he English word “appropriate”, the French word “correspondant”, and the Portuguese word “correspondante” [in the three versions of Art. XXII(2)] share the common meaning of “correlation between two things”. …

IPL2 stands for the proposition that...gross income from a source in a particular location must be reduced by any deduction that may reasonably be regarded as applicable to that source. Tax is then computed on this net amount... . While the Treaty does not explicitly set out that Canadian tax be computed in this manner for the purposes of Article XXII(2), it is implicit in the phrase “income tax as computed before the deduction is given” which appears in Article XXII(2).

[T]he tax sparing provision was intended to avoid neutralizing any tax incentive offered by Brazil on interest income, a result that was achieved by means of Canada’s agreement to forego any Canadian tax on Brazilian interest income earned by a Canadian resident to which Article XXII(3) applies. It seems unlikely that the tax sparing provision was intended…to operate to shelter not only Brazilian interest income from Canadian tax, but income from other sources unrelated to Brazil as well. …

After noting (at paras. 69-70) that:

Article 23B of the 1977 OECD Model....uses the phrase “that part of the income tax… which is attributable…to the income…which may be taxed in that other state.”

I agree...that “attributable” as used in that phrase is equivalent to “appropriate”... . The French version of Article 23B of the 1977 OECD Model translates “appropriate” as “correspondant”, the same word that is used in the French version of Article XXII(2) of the Treaty.

he stated (at para. 72):

At paragraph 63 of the Commentaries [on the 1977 OECD Model], the limitation on the deduction [in Art. 23B] is stated to be “normally computed as the tax on net income, i.e. on the income from [the State of source] less allowable deductions.”

Paris J went on to state (at para. 88):

The applicable test for determining which expenses are relevant to income from a source in a particular place is found in subsection 4(1) of the Income Tax Act… .

The taxpayer, who was resident in the UK, paid US income taxes on his share of the profits of an LLC of which he was a member, and also paid UK income taxes on income remitted to the UK including such share of the LLC's profits. He would have been entitled to relief under Art. 23 of the UK-US Double Tax Convention from UK tax on such profits if the UK tax was "computed by reference to the same profits or income by reference to which the United States tax [was] computed."

The First-tier Tribunal ("FTT") found that the combined effect of the Delaware LLC Act and the LLC agreement made between the members was that under the law of Delaware, the members automatically became entitled to their share of the profits generated by the business carried on by the LLC as they arose: prior to, and independently of, any subsequent distribution (para.119), so that Mr Anson was taxed on the same income in both countries, and was entitled to double taxation relief under Art. 23.

This finding was reversed by the Upper Tribunal, whose decision was affirmed by the Court of Appeal, but was restored by the Supreme Court.

The Upper Tribunal construed the FTT's finding, that the profits "belonged" to the members as they arose, as a legally erroneous finding that the profits vested in the members as their property. However, Lord Reed found that when the FTT described the profits as belonging to the members it was referring to a personal right rather than a proprietary right (such as that of the members of a Scottish partnership).

Therefore, contrary to the Commissioners' submissions that the profits generated by the LLC belonged to it and income to Mr Anson arose only as and when profits were distributed, the FTT found that the members of the LLC had an interest in the profits of the LLC as they arose. Accordingly, Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC.

Thus, the "income arising" in the US, being his share of the profits, was income liable to tax under UK law, to the extent that it was remitted to the UK, so that his liability to UK tax was computed by reference to the same income as was taxed in the US, and he was entitled to relief under Art. 23(2)(a) (para. 121)..

Before so concluding, Lord Reed stated (at para. 114):

The words "the same" are ordinary English words. ...]A] degree of pragmatism in their application may be necessary...for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions.

The taxpayer, who was resident in the UK, paid US income taxes on his share of the profits of an LLC of which he was a member, and also paid UK income taxes on income remitted to the UK including such share of the LLC's profits. He would have been entitled to relief under Art. 23 of the UK-US Double Tax Convention from UK tax on such profits if the UK tax was "computed by reference to the same profits or income by reference to which the United States tax [was] computed."

In finding that this requirement was not satisfied, given that the distribution of the profits to the taxpayer (so as to attract UK tax) was distinct from the earning of the profits by the LLC in the first place (resulting in the US tax), i.e., the LLC was fiscally transparent for US but not UK purposes, Lady Justice Arden stated (at para. 57):

If profit is earned by an entity, and the source of the profit to the taxpayer as a member of that entity is a contract as between him and other members, then in the usual case it follows that the source of his income must be a different source of income from that of the entity itself. The fact that there is a contract generally suggests that there is a disposition of a right to the profits from one person to another. That result can be avoided if the member had a proprietary right to the profits as they arose. This would as I see it generally be the case where income accrues to a trust under which an income beneficiary has an interest in possession, or to a unit trust or collective investment scheme, if the investors have a beneficial interest in the assets that are subject to the unit trust or scheme.

In the case of the LLC, there was "nothing to suggest that it did not have unqualified ownership of its assets or that its members had any interest in those assets" (para. 77). She further stated (at para. 64):

It would be unusual but not impossible for an entity with a separate legal personality, such as a company, to be tax transparent for English law purposes. One example would be the Scottish partnership where the partnership is a separate legal entity and holds the assets of the business, but the partners have an (indirect) interest in the assets and carry on business in common: this has been held by this court to be tax transparent....

In order to finance the acquisition of U.S. companies, the taxpayer set up a "tower structure," a chain of subsidiaries which had different tax treatment in Canada and the U.S.. For U.S. tax purposes, the income the taxpayer received under this structure was interest income arising in the U.S.; for Canadian tax purposes, it realized its income in the form of dividends received by a subsidiary partnership from a subsidiary Nova Scotia unlimited liability company (which, in turn, received dividends from a subsidiary US limited liability company.) Both the dividends paid by the LLC (which came out of its exempt surplus) and the dividends paid by the Nova Scotia ULC and allocated to the taxpayer by the subsidiary partnership (which were eligible for the intercorporate dividend deduction when allocated to the taxpayer) were exempt from Canadian tax.

Paris J. found that the taxpayer could not claim the U.S. tax as a deduction from income under s. 20(12) of the ITA because the tax could be reasonably regarded as having been paid in respect of income from the share of the capital stock of a foreign affiliate (the US LLC). This approach was consistent with Art. XXIV, para. 2(a) of the Canada-US Convention, as the US income taxes were paid on US source income that was not taxed in Canada, so that relief under that paragraph was not available (para. 81). Canada's obligations under Article XXIV did not extend beyond relief from double-taxation, of which there was none here (para. 80).

The taxpayer, who was a U.S. citizen resident in Canada, did not claim treaty benefits when filing his U.S. return, with the result that his U.S.-source pension income was subject to U.S. income tax at graduated rates rather than the treaty-reduced rate of 15%.

Hershfield J., after finding that the overpayment by the taxpayer did not qualify as a tax, indicated (at p. 2398) that paragraph 2 of Article XXIV of the Canada-U.S. Convention did not refer, like paragraph 1 of that Article, to a credit only being provided where the "appropriate amount of income tax" was paid or accrued to the source jurisdiction because "the Canadian drafters of the Treaty would be allowed to rely on jurisprudence or opinions that would confirm that an amount paid gratuitously without basis under the laws of the foreign jurisdiction would not be a 'tax'".

The taxpayer, a Canadian resident corporation, owned all the shares of an Israeli corporation (“CAN-IS”) that received a dividend from another Israeli corporation (“ICL”) that was not a foreign affiliate of CAN-IS. The dividend constituted foreign accrual property income of the taxpayer.

Under Art. 23(1) of the Canada-Israel Treaty, Canada was required to give credit for Israeli tax payable by a resident of Canada on income arising in Israel and, under Art. 23(2)(b), Israeli tax payable was deemed to include Israeli tax on dividends and interest that would have been payable but for a specified exemption or reduction in tax under Israeli law (which exempted the dividend in question). The taxpayer claimed credit for the Israeli tax spared under Art. 23(2)(b).

Section 2 of the Protocol to the Treaty provided:

Nothing in this Convention shall be construed as preventing Canada from imposing tax on amounts included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act...

Tremblay TCJ rejected the Crown’s submission that the Treaty did not require Canada to give relief for the Israeli tax because the tax was levied on the Israeli corporation (CAN-IS) and not on the Canadian parent corporation. On the basis that tax treaties were to be given a “liberal” interpretation, he concluded that, under the FAPI rules, taxes paid by a controlled foreign affiliate of a Canadian parent corporation were to be treated as paid by the parent.

However, s. 2 of the Protocol indicated that the Treaty did not prevent Canada from imposing tax on residents of Canada under the FAPI rules and that the Treaty did not require Canada to give relief for foreign tax if those rules applied. Accordingly, the taxpayer was not entitled to a deduction under ITA s. 91(4) by virtue of the prohibition in s. 2.