2014-0555061E5 Canada-Japan Income Tax Convention, Article 13

Principal Issues: Meaning of expression "arising in the other Contracting State"

Position: Gains from the disposition of TCP arise in Canada

Reasons: See below

Author: Belova, Julia
Section: ITA: 115, 248(1) "Taxable Canadian Property"; Can.-Japan Treaty: XIII(4); ITCIA: 6.3

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                                                                                                                                                        Julia Belova
                                                                                                                                                        2014-055506

November 17, 2014

Re: Article 13 of the Canada-Japan Income Tax Convention

We are writing in response to your email dated October 1, 2014 in which you enquired about the meaning of the expression “arising in the other Contracting State” in the context of paragraph 4 of Article 13 of the Canada-Japan Income Tax Convention (the “Treaty”) (footnote 1).

Paragraph 4 of the Treaty states that “Gains derived by a resident of a Contracting State from the alienation of any property other than that referred in paragraphs 1 to 3 and arising in the other Contracting State may be taxed in that other Contracting State”.  You asked whether a gain would be considered to arise where the property is located or where the transaction is completed and whether paragraph 4 of Article 13 of the Treaty would permit Canada to tax a Japanese resident on a gain from the sale of the property if the sale took place in Japan.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) (footnote 2) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

The taxable capital gains of a non-resident of Canada from the disposition of “taxable Canadian property” (“TCP”), as this term is defined in subsection 248(1) of the Act, are taxable in Canada subject to relief available under the applicable bilateral tax treaty. However, if the property is not TCP, a capital gain of a non-resident person from its disposition would not be taxable to the non-resident under the provisions of the Act regardless of the provisions of the applicable tax treaty.  In other words, tax treaties are relieving in nature and would not impose tax where it is not otherwise applicable under the domestic rules.

On the assumption that the property in question is TCP that falls under paragraph 4 of Article 13 of the Treaty, a gain from its disposition would be taxable in Canada if the gain arises in Canada. Pursuant to paragraph 2 of Article 3 of the Treaty, unless the context otherwise requires, undefined terms in the Treaty have the meaning given to them under domestic legislation. Pursuant to paragraph 6.3 of the Income Tax Convention Interpretation Act (Canada) (the “ITCIA”), except where a convention expressly otherwise provides, a gain from the disposition of TCP is deemed to arise in Canada.  In our view there is nothing in the Treaty that expressly provides where a gain described in paragraph 4 of Article 13 arises.  Therefore, if the gain pertains to the disposition of TCP, it would be deemed by paragraph 6.3 of the ITCIA to arise in Canada even if the sale took place in Japan and paragraph 4 of Article 13 of the Treaty would permit Canada the right to tax such gain.

We trust these comments to be of assistance.

Yours truly,

Olli Laurikainen, CPA, CA
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  “Convention Between The Government of Canada and The Government of Japan For The Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Income”, signed on May 7, 1986, as amended by Second Protocol signed on February 19, 1999.
2  Income Tax Act (Canada), R.S.C.  1985, c.1 (5th Supp.), as amended to the date of this letter.

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