17 September 2007 External T.I. 2007-0250101E5 - Article 12(4) of Canada/Switzerland Tax Convention

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an aircraft would be considered to be equipment for the purposes of Article 12(4) of the Canada-Switzerland Tax Convention.

Position: Yes.

Reasons: Generally accepted meaning of the word "equipment"

								2007-025010
XXXXXXXXXX 							D. Zhang
(613) 957-2104
September 17, 2007

Dear XXXXXXXXXX:

Re: Article 12(4) of the Canada-Switzerland Tax Convention

We are writing in response to your letter of August 16, 2007 in which you requested our comments regarding the tax treatment of payments for the use of an aircraft under the Canada-Switzerland Tax Convention (the "Treaty").

The situation that you have described involves a Canadian resident corporation that makes payments to a related Swiss resident corporation for the use of an aircraft owned by the latter corporation. Pursuant to paragraph 212(1)(d) of the Income Tax Act (the "Act"), the portion of the payments relating to the use of the aircraft in Canada is subject to withholding tax at 25%.

Pursuant to Article 12(2) of the Treaty, the tax payable in Canada for royalties arising in Canada and beneficially owned by a resident of Switzerland is reduced to 10% of the gross amount of the royalties. The term "royalties" is defined in Article 12(4) to mean, inter alia, "payments of any kind received as a consideration...for the use of, or the right to use, industrial, commercial or scientific equipment,..."

In your view, an aircraft should not be considered to be "equipment", and therefore, the payments would not constitute royalties within the meaning of Article 12(4) of the Treaty and should instead be governed by Article 7 of the Treaty.

Our Comments

The situation outlined in your letter appears to relate to a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

The term "equipment" is not defined in the Treaty. Where a term is not defined, Article 3(2) of the Treaty states that it has the meaning under the law of the State concerning the taxes to which the Treaty applies. It is our view that, under our law, the term "equipment" would be given its ordinary meaning as required by the context in which it is used. In this respect, we note that the Dictionary of Canadian Law (Third Edition) defines the word "equipment" to include "apparatus, device, mechanism, structure, machine, machinery, tool, contrivance or vehicle". The Webster's Third New International Dictionary defines "equipment" to include "the implements (as machinery or tools) used in an operation or activity; apparatus; all the fixed assets other than land and buildings of a business enterprise; the rolling stock of a railway". The Oxford English Dictionary (Second Edition) defines "equipment" to include "anything used in equipping; furniture; outfit; warlike apparatus; necessaries for an expedition or voyage".

Based on the foregoing, we are of the view that the treatment of an aircraft as "equipment" for the purposes of the Treaty would be consistent with the ordinary meaning of that term.

We trust that these comments are of assistance.

Yours truly,

Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch