2023-0990821E5 Definition of Designated Treaty Country

Principal Issues: Whether a sub-jurisdiction (a territory, possession, department, dependency or area) of a sovereign state or jurisdiction, that is excluded from the territorial scope of a tax treaty, or a TIEA, that Canada has entered into with that sovereign state or jurisdiction, would be considered a “designated treaty country” under subsection 5907(11) of the Income Tax Regulations, by virtue of a bilateral agreement between the sub-jurisdiction and that sovereign state or jurisdiction.

Position: No.

Reasons: The territorial scope of a tax treaty or a TIEA must be determined in accordance with its negotiated terms and international law. An internal agreement between the other jurisdiction and one of its sub-jurisdictions would not be sufficient to extend the territorial application of the tax treaty or TIEA.

Author: Liu, Vicky
Section: 5907(11) of the Income Tax Regulations

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                                                                                                   Vicky Liu

March 1, 2024

Subject: Definition of Designated Treaty Country

We are writing in response to your email dated September 9, 2023, requesting our views on the definition of “designated treaty country” in subsection 5907(11) of the Income Tax Regulations (the “Regulations”). You presented a hypothetical situation for our consideration which we have restated in more general terms as follows:

“Country A is a sovereign state with an overseas territory, Sub-jurisdiction A. Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income (“tax treaty”) with Country A (the “Canada - Country A tax treaty”). Sub-jurisdiction A was an overseas territory of Country A at the time the original Canada - Country A tax treaty was signed. The ‘territorial scope’ article of that tax treaty specifies that the term ‘Country A’ does not comprise Sub-jurisdiction A. The tax treaty does not contain a ‘territorial extension’ article. However, if Country A has entered into a bilateral agreement with Sub-jurisdiction A to the effect that the competent authorities of Country A and Sub-jurisdiction A shall exchange information as is foreseeably relevant for carrying out its obligations under the tax treaties or comprehensive tax information exchange agreements (“TIEAs”) entered into by Country A, as well as affirming Sub-jurisdiction A’s commitments to support Country A’s obligations under any tax treaty or TIEA, to provide upon request information necessary to international reporting frameworks to which Country A is subject, etc., would Sub-jurisdiction A be considered a ‘designated treaty country’ under subsection 5907(11) of the Regulations?”

Analysis

Canada has tax treaties or TIEAs with many sovereign states and jurisdictions. Some of them contain a definition to specify whether, certain territories, possessions, departments, dependencies or areas of a sovereign state or jurisdiction, are included, or not included, in the territorial scope of the tax treaty or TIEA that Canada has entered into with that sovereign state or jurisdiction.

Subsection 5907(11) of the Regulations defines “designated treaty country” as:

“For the purposes of this Part, a sovereign state or other jurisdiction is a ‘designated treaty country’ for a taxation year of a foreign affiliate of a corporation if Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income, or a comprehensive tax information exchange agreement, in respect of that sovereign state or jurisdiction, that has entered into force and has effect for that taxation year, but any territory, possession, department, dependency or area of that sovereign state or jurisdiction to which that agreement or convention does not apply is not considered to be part of that sovereign state or jurisdiction for the purpose of determining whether it is a designated treaty country.”

(Emphasis Added).

In our view, the provision clearly provides that a designated treaty country does not include any territory, possession, department, dependency or area of a sovereign state or jurisdiction to which the relevant tax treaty or TIEA does not apply.

In your hypothetical example, Country A has entered into an agreement with Sub-jurisdiction A to the effect that the competent authorities of Country A and Sub-jurisdiction A shall exchange information as is foreseeably relevant for carrying out its obligations under the treaties or TIEAs entered into by Country A, as well as affirming Sub-jurisdiction A’s commitments to support Country A’s obligations under any tax treaty or TIEA, to provide upon request information necessary to international reporting frameworks to which Country A is subject, etc.

In our view, such agreement will not, by itself, extend the territorial scope of the Canada - Country A tax treaty to Sub-jurisdiction A. The territorial scope of a tax treaty must be determined in accordance with the terms of the treaty and international law. Any provision to be included in or amended for Canada’s tax treaties must be determined on a bilateral basis, by Canada and the other contracting state. Accordingly, Sub-jurisdiction A, in your hypothetical example, would not be considered a designated treaty country pursuant to subsection 5907(11) of the Regulations.

Our comments relate to the hypothetical bilateral tax treaty in the context described above. Where a treaty contains a territorial extension clause, the outcome will depend on the words of the provision and facts of the specific case. Examples of territorial extension clauses include Article 30 of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital 2017 and Article 29 of the Convention on Mutual Administrative Assistance in Tax Matters.

We trust our comments will be of assistance.

Yours truly,

Angelina Argento
Manager
for Division Director
International Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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