Article 3 - General Definitions

Cases

Anson v. HMRC, [2015] UKSC 44

scheme in Treaty article for allocating income between jurisdictions amounted to a definition of "source"

In rejecting the Commissioners' argument that article 3(2) of the 1975 U.K-U.S. Convention required the term "sources" as used in article 23 thereof to be given the meaning which it bore under U.K tax law, Lord Reed stated (at para. 100):

[A]rticle 23(3) explains how the source of profits or income is to be determined for the purposes of article 23, and that explanation is unrelated to the source doctrine of UK tax law.

See summary under Art. 24.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation profits of LLC earned directly by members 36
Tax Topics - Treaties - Income Tax Conventions - Article 24 UK LLC member had a personal (non-proprietary) entitlement to his share of LLC profits as they arose 465
Tax Topics - Treaties - Income Tax Conventions - Article 4 pragmatic approach to determining "same" - also appearing in IV,7(b) of Cda-US Treaty 130

Canada (Attorney General) v. Kubicek Estate, 97 DTC 5454 (FCA)

The Court found that a "gain" for purposes of Article XIII, paragraph 9 of the Canada-U.S. Convention was a gain determined for purposes of s. 40(1) of the Act, i.e., a gain determined with reference to the period after December 31, 1971, rather than with reference to the total period of ownership (in this case, since 1967). MacGuigan J.A. noted (at p. 5456) that "the Convention does not require that there be a definition in the domestic legislation but only that the meaning of the term in question can be derived from it".

Locations of other summaries Wordcount
Tax Topics - Treaties 58
Tax Topics - Treaties - Income Tax Conventions - Article 13 period before 1972 excluded 89

Rutenberg v. MNR, 79 DTC 5394, [1979] CTC 459 (FCA)

Canadian real estate dealings of the U.S.-resident taxpayer were held not to be activities of a U.S. enterprise, since the initiative in the development and management of the ventures was left largely to a real estate broker and dealer in the Montreal area.

See Also

Fowler v HM Revenue and Customs, [2018] EWCA Civ 2544

a domestic provision deeming employment income to be from trade rendered it business profits for Treaty purposes

The taxpayer was a resident of South Africa for purposes of the U.K-South Africa Convention (the “Treaty”) who, as an employee, undertook diving engagements in the UK continental shelf waters. S. 15 of the Income Tax (Trading and Other Income) Act 2005 deemed divers in the continental shelf area, whose duties consisted mainly of seabed diving activities, to thereby be carrying on a trade in the U.K. The majority of the Court of Appeal restored the decision of the FTT, which was that by virtue of s. 15 the taxpayer’s diving income was to be treated for purposes of the Treaty as business profits (Art. 7) rather than employment income (Art. 14), so that such business was not subject to U.K tax given that he had no U.K permanent establishment.

After referring (at para. 36) to the Marshall v Kerr principle that “because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so," Henderson LJ stated (at paras. 39, 42):

The unambiguous effect of the deeming in section 15(2) is … that the performance by Mr Fowler of the relevant diving activities is treated as the carrying on by him of a trade, giving rise to trading income … . This treatment entirely displaces the charge to tax on employment income … . Furthermore, to the extent that Mr Fowler's activities were comprised in the deemed trade, they could not simultaneously be regarded for any income tax purposes as performance by him of the duties of his actual employment.

My approach does not depend to any significant extent on the provisions of article 3(2) … however, I would accept … that the purpose of article 3(2) is to anchor the provisions of the treaty … to the domestic tax law of the Contracting State which is applying the treaty.

In his concurring reasons, Baker LJ stated (at para. 47):

The term "employment" is not defined in the treaty and, under article 3(2), is ascribed the meaning that it has under UK tax law. Under that law, in respect of his seabed diving activities as defined in s.15…, Mr Fowler is deemed not to be in employment but rather carrying on a trade. Insofar as his income falls within s.15, it follows that it is not remuneration in respect of an employment under UK law and as a result article 14 of the treaty does not apply. Mr Fowler's income … therefore falls within article 7.

In the dissenting reasons, Lewison LJ stated (at para 13) that Art. 3(2) permitted reference to the general common law of England to determine the meaning of “employment,” and further stated (at para. 22):

I cannot extract from [a South African] case the general proposition that a word used in a double tax treaty to describe a particular source of income or gain necessarily encompasses a domestic deeming provision, particularly where the word in question is defined in domestic tax law … .

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 7 employment income deemed by domestic provision to be business profits 131
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions domestic deeming provision had Treaty effect 259

Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia)

each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise”

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of significant shareholdings in an Australian TSX-listed corporation (Talison Lithium) which, through a grandchild corporation held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. Before finding that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium was not exempt under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 for dispositions of (deemed) real property situated in Australia, Pagone J found that such gains were from “entreprises of” the U.S. limited partners, stating (at para. 57) that this expression encompassed “a passive investment activity" of the U.S.-resident partners, and stating further (at para. 57) that:

…in Thiel, their Honours said that “no element of repetition or system should be attributed to [the] expression” “enterprise of one of the Contracting States” by reference to the use of the words “carried on”… . Neither the RCF IV partnership nor the RCF V partnership is a separate taxable entity to be taxed separately from the partners and their agents. The taxable activity in each case was an investment in … Talison Lithium which was carried out on their behalf by their respective General Partners.

Words and Phrases
enterprise
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares private equity fund LP with 5-year holding objective realized share gain on income account 167
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) gains of a NR PE fund from disposals of Australian share investments that were managed in part in Australia were derived from Australia 411
Tax Topics 386
Tax Topics - Treaties - Income Tax Conventions - Article 13 exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild
Tax Topics - General Concepts - Stare Decisis lower court not bound by a point of law that was assumed rather than examined by a higher court 272
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 83
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 180
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property 500
Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment shares of Australian mining company were primarily attributable to the processing rather than mining operations 140
Tax Topics - General Concepts - Fair Market Value - Other processing assets of mining company were more valuable than its mining assets 234

Fowler v. HMRC Commissioners, [2016] UKFT 0234 (TC) (First-Tier Tribunal)

“treatment is the meaning” – employment income deemed by U.K. domestic legislation to be from carrying on a “trade” was therefore deemed by Art. 3(2) to be “business profits” for Treaty purposes

The taxpayer was a resident of South Africa for purposes of the U.K-South Africa Convention (the “Treaty”) who, likely as an employee, undertook diving engagements in the UK continental shelf waters. S. 15 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) deemed divers in the continental shelf area, whose duties consisted mainly of seabed diving activities, to thereby be carrying on a trade in the U.K. This was a reference on the question whether the application of s. 15 to the taxpayer would have the effect of deeming his diving income to be treated for purposes of the Treaty as business profits (Art. 7) rather than employment income (Art. 14). His position was that he had no permanent establishment in the U.K., so that his business profits would not be subject to U.K. income tax.

After referring to Art. 3(2) of the Treaty (which corresponded to Art. 3(2) of the OECD Model Convention) and to the interpretive principles established under the Vienna Convention, as judicially interpreted, and before concluding that the taxpayer’s income from diving would fall within Art. 7, Brannan J stated (at paras. 107, 111):

[T]he words “enterprise” and “business” are not defined terms for the purposes of Article 3(2). It follows that the meaning of these terms, as well as the meaning of “salaries, wages and other similar remuneration derived… in respect of an employment”, must be determined in accordance with domestic UK tax law.

…[T]he phrase “[t]he profits of an enterprise” within Article 7 includes the charge to income tax on the “profits of a trade, profession or vocation” within the meaning of section 5 ITTOIA 2005 and that it also includes the profits arising from the deemed trade pursuant to section 15 ITTOIA.

And at paras 113 & 114:

It is the clear purpose of section 15 ITTOIA to re-characterise what would otherwise be the exercise of employment duties as the carrying on of a trade. In so doing, in my view, section 15 ITTOIA has the meaning that the activities of an employed diver in the UK Continental Shelf constitute trading activities and that the income therefrom must be trading income and, consequently, business profits within Article 7 – the treatment is the meaning.

Moreover, section 6(5) ITEPA[Income Tax (Earnings and Pensions Act] excludes income from the charge to income tax on employment income if the income falls within section 15 ITTOIA. This, therefore, has the meaning that, under the provisions of UK tax law which correspond to Article 14, Mr Fowler’s income is not employment income and cannot fall within Article 14.

Brannan J also stated (at para. 115):

If a Contracting State changes its domestic law after the conclusion of a double tax treaty in such a way as to reallocate income from one article to another...that could contravene the requrements of good faith imposed by Article 31(1) of the Vienna Convention... .

That issue did not arise here as s. 15 was enacted well in advance of the Treaty in order to give a break (through greater deductions) to divers, whose activities were dangerous.

Thiel v. Federal Commissioner of Taxation, 90 A.TC 4717 (HC of A.)

"enterprise" includes an isolated adventure

In January and May 1984 the taxpayer, who was a resident of Switzerland, paid $150,000 to acquire six units in the Energy Research Group Unit Trust, in November 1984 he sold his six units to Energy Research Group Australia Ltd. for $300,000 to be satisfied by the issuance to him of 600,000 ordinary shares of that company, and in 1985, following a listing of the shares on the Australian Stock Exchange, he sold 252,000 of his shares for $566,307. The majority found that the taxpayer's activities constituted an "enterprise" for purposes of Article 7 of the Australia-Switzerland Convention regardless whether they constitued an isolated adventure or the recurring conduct of a business. Accordingly, the profits of this enterprise were exempt from taxation under the Income Tax Assessment Act 1936 (Australia).

Words and Phrases
enterprise carry on
Locations of other summaries Wordcount
Tax Topics - Treaties 75

Administrative Policy

8 September 2017 External T.I. 2014-0549771E5 - Article XXIX-A:3

"person related thereto" defined by ITA meaning of "related person"

After noting the relevance of domestic definitions of a term under Art. III, para. 2, CRA stated that "the phrase 'person related thereto' [in Art. XXIX-A, para. 3 of the Canada-U.S. Treaty] should take its meaning from subsection 251(2)."

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 29A a trust is related for purposes of Art. XXIX-A (3) of the Canada-U.S. Treaty to a corporation that is controlled by its corporate trustee 326
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(b) - Subparagraph 251(2)(b)(i) a trust is related to a sub of its corporate trustee 72

31 January 1992 T.I. (Tax Window, No. 13, p. 23, ¶1610)

Because a partnership is not a "company" for purposes of the Canada-U.S. Convention, a partnership of two corporations will not be eligible for the reduced withholding tax rate on dividends of 10% for a company owning at least 10% of the voting shares of the payor.

1992 A.P.F.F. Annual Conference, Q. 12 (January - February 1993 Access Letter, p. 54)

Conventions are legally binding in Canada from the time they are enacted.

6 January 1992 T.I. (Tax Window, No. 15, p. 14, ¶1679)

If a Norwegian limited partnership which has no Canadian partners qualifies as a resident of Norway for purposes of the Canada-Norway Income Tax Convention, rental payments derived from the use of moveable property in Canada will be treated as business profits provided that the income is taxed in the partnership. If the income of the limited partnership is taxed in the hands of the Norwegian partners, it will be a question of fact whether or not the partners are carrying on a business and whether that business is being carried on in Canada through a permanent establishment. Where a partner of the Norwegian limited partnership is a resident of a country other than Norway or Canada, the articles of the appropriate tax convention will apply.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 7 19

27 September 1991 T.I. (Tax Window, No. 10, p. 23, ¶1483)

As "individual" is not defined in the Canada-Barbados Convention and as A.XVI(5) requires reference to domestic law for undefined words, "individual" includes a trust.

31 July 1991 T.I. (Tax Window, No. 7, p. 22, ¶1378)

The term "arm's length" in subparagraph 4(a) of Article XI of the Canada-Netherlands Convention must be given the meaning it has for purposes of the Income Tax Act. Accordingly, a borrower who is "related" to the lender within the meaning of s. 251 will not be dealing at arm's length for purposes of the Convention.

Articles

D. Sandler, J. Li, "The Relationship between Domestic Anti-Avoidance Legislation and Tax Treaties", 1997 Canadian Tax Journal, Vol. 45, No. 5, p. 891.

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