Words and Phrases - "appropriate"


Société générale valeurs mobilières inc. v. The Queen, 2016 TCC 131, aff'd 2017 FCA 3

Brazilian tax sparing provision did not permit the taxpayer to shelter Canadian-source income

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… .

Words and Phrases
appropriate attributable
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) foreign source interest reduced by related expenses 390
Tax Topics - Treaties OECD commentaries applied to Brazil (not an OECD member) 209

Penny v. The Queen, 95 DTC 5083 (FCTD)

appropriation includes de facto taking for which no legal entitlement

An account receivable owing to a private corporation controlled by the taxpayer was found to have been appropriated by him given the receipt (and reporting of interest) by him on the receivable and the subsequent receipt of payment by him of the receivable. Although the receivable could not have been realized at the time of the appropriation (due to the financial position of the payor), Simpson J. found that in the absence of evidence of the actual value of the receivable, its value must be taken to be its face value. In response to a submission that the taxpayer could not have sued personally for payment of the receivable in view of the commission agreement which made it payable to the corporation, Simpson J. noted that s. 15 referred to an appropriation "in any manner" and stated (at p. 5086) that "to me, this language encompasses a de facto taking". He also noted that the word "appropriate" in s. 15(1)(b) "conveys a notion of taking but does not necessarily require a formal documented taking".

Words and Phrases