26 March 2009 External T.I. 2007-0259991E5 - Article 13 Canada - Japan Income 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 a capital gain realized on the sale of the shares of a Canadian private corporation by a Japanese resident is taxable in Canada?

Position: Yes

Reasons: The shares in issue are taxable Canadian property and Canada is not precluded from taxing the gain under Article 13 of the Canada - Japan Income Tax Convention

										2007-025999
XXXXXXXXXX 									Gwen Mah
										613-957-2113
March 26, 2009

Dear XXXXXXXXXX :

Re: Canada - Japan Income Tax Convention

We are writing in response to your letter of November 19, 2007 seeking our views on the Canadian tax implications to a resident of Japan who sells to another resident of Japan, shares of the capital stock of a Canadian corporation that are taxable Canadian property. More specifically, you have asked us whether any capital gain realized on the sale of the shares would be taxable in Canada. As a matter of background, you have asked us to assume that the negotiations leading to the sale of the shares and the sale itself was concluded in Japan, the shares are not listed on a designated stock exchange and the shares are not shares of a non-resident owned investment corporation or a mutual fund corporation.

Our Comments

Please note that it is not this Directorate's practice to comment on 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 Canada Revenue Agency (CRA) publications, referred to below, can be accessed on the CRA website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments, which we trust will be of some assistance.

Paragraph 2(3)(c) of the Income Tax Act (Act) provides that where a person who is not a resident of Canada disposes of "taxable Canada property" at any time in the year or a previous year, the person shall pay income tax on the person's taxable income earned in Canada as determined under section 115 of the Act. "Taxable Canadian property" is defined in subsection 248(1) of the Act and includes a share of the capital stock of a corporation resident in Canada (other than certain non-resident owned investment corporations or a mutual fund corporation) that is not listed on a designated stock exchange.

Where a non-resident person disposes of shares of a Canadian corporation that are taxable Canadian property that person will be liable to tax in Canada under section 115 of the Act, subject to any relief from such tax that is provided under an applicable tax treaty. In circumstances where the person disposing of the shares is a resident of Japan within the meaning of Article 4 of Canada-Japan Income Tax Convention (Convention), the person is subject to tax in Canada unless relief from taxation is provided under Article 13 of the Convention. Paragraphs 1 - 3 of Article 13 set out rules relating to the taxation of gains from the alienation of specific types of property (these specific types of property do not include the shares of the capital stock of a corporation). Paragraph 4 of Article 13 then provides:

Gains derived by a resident of a Contracting State from the alienation of any property other than that referred to in paragraphs 1 to 3 and arising in the other Contracting State may be taxed in that other Contracting State.

Accordingly, paragraph 4 of Article 13 of the Convention allows a gain realized by a resident of Japan from the alienation of the shares of the capital stock of a corporation resident in Canada to be taxed in Canada if the gain arises in Canada.

Section 6.3 of the Income Tax Conventions Interpretation Act (ITCIA) was enacted in 1999 and applies to dispositions of property that occur after February 23, 1998. It states:

Except where a convention expressly otherwise provides, any amount of income, gain or loss in respect of the disposition of a property that is taxable Canadian property within the meaning assigned by the Income Tax Act is deemed to arise in Canada. (underlining added)

There is no provision in the Convention that would override section 6.3 as it applies to the disposition of shares that are taxable Canadian property. Accordingly, section 6.3 of the ITCIA will deem the disposition, by a Japanese resident, of shares of the capital stock of a corporation that are taxable Canadian property, to arise in Canada.

Please note that due to the addition of section 6.3 of the ITCIA, the document cited in your letter (9510365) no longer represents our position.

We trust the above is helpful. Please contact Gwen Mah at 613-957-2113 if you have any questions or comments.

Yours truly,

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