Principal Issues: Y Co. owns all the shares of two corporations that own commercial real estates in Canada which are fully leased to arm's length lessees. X Co. disposed of the shares of Y Co. Are Y Co. shares shares the value of which is derived principally from immovable property situated in Canada for the purposes of Article 13(4) of the Canada-Luxembourg tax convention?
Position: To determine whether the value of Y Co. shares is derived principally from immovable property, a consolidated basis approach would be used. Therefore the immovable properties held by the subsidiaries of Y Co. would be taken into account even if only held indirectly by Y Co.
Reasons: The look-through provision using the expression "derived from" is broader than the look-through provision using the expression "consist of", the latter expression referring to the assets being held directly by the corporation. The use by Canada of an expanded definition of immovable property to include specifically the shares of a company, the underlying value of which is derived from immovable property in some of its tax conventions is for greater certainty purposes.
XXXXXXXXXX 2005-014448 Sylvie Labarre, CA December 4, 2007
Dear Sir:
Re: Article 13 of the Canada-Luxembourg Income Tax Convention
This is in reply to your fax of July 28, 2005 in which you requested our views on paragraph 4 of Article 13 of the Canada-Luxembourg Income Tax Convention (hereinafter the "Treaty"). We apologize for the delay in responding.
Facts
X Co. is a Luxembourg incorporated entity qualifying as a Soparfi (Société de participation financière). X Co. is resident in Luxembourg for purposes of the Treaty and is not excluded from the provisions of the Treaty by paragraph (3) of Article 28.
X Co. owns all the shares of Y Co. a Luxembourg incorporated entity also qualifying as a Soparfi. Y Co. is resident in Luxembourg for the purposes of the Treaty and is not excluded from the provisions of the Treaty by paragraph (3) of Article 28.
Y Co. owns all the shares of A Co. and B Co. These companies were incorporated in Canada and are resident in Canada for the purposes of the Treaty. A Co. and B Co. derive their value substantially from commercial real estate located in Canada which is fully leased to arm's length lessees.
During the liquidation of X Co. (that is not a taxable event for Luxembourg tax purposes), the shares of Y Co. are distributed to one group of shareholders.
In your view, the distribution of the Y Co. shares by X Co. on liquidation is a taxable event for Canadian tax purposes. However, paragraph (5) of Article 13 of the Treaty limits Canada's ability to tax Canadian source capital gains realized by a Luxembourg resident in situations other than those specifically covered in paragraph 1 through 4 of Article 13.
Question
As the gain is not covered in paragraph 1 through 3 inclusive, does paragraph 4 of Article 13 of the Treaty allow Canada to tax gains realized by X Co. from the alienation of the shares of Y Co.?
Our comments
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service. Although we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Paragraph 4 of Article 13 of the Treaty reads as follows:
4. Gains derived by a resident of a Contracting State from the alienation of:
(a) shares (other than shares listed on an approved stock exchange in the other Contracting State) forming part of a substantial interest in the capital stock of a company the value of which shares is derived principally from immovable property situated in that other State; or
(b) an interest in a partnership, trust or estate, the value of which is derived principally from immovable property situated in that other State.
may be taxed in that other State. For the purposes of this paragraph, the term "immovable property" does not include property (other than rental property) in which the business of the company, partnership, trust or estate was carried on; and a substantial interest exists when the resident and persons related thereto own 10 per cent or more of the shares of any class or the capital stock of a company.
In your view, the value of the shares of Y Co. is not derived principally from immovable property situated in Canada (as Y Co. does not own the immovable property directly) and paragraph 4 of Article 13 does not apply to your situation. We do not agree with your view. To take such a view would require that we apply the same meaning for the expression "derived from" used in the Treaty as for the expression "consist of" used in other income tax conventions. In our view, the look-through provision using the expression "derived from" is broader than the look-through provision using the expression "consist of". If the expression "consist of" had been used, we would have considered only the assets directly owned by the company. However, in our view, the use of the expression "derived from" allows us to consider the assets on a consolidated basis and therefore to consider the immovable property owned by the subsidiaries of Y Co.
In our view, it is only for greater certainty that the term "immovable property" has been expanded in certain tax conventions to include shares of a company or an interest in a partnership, estate or trust, the underlying value of which is derived from immovable property.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch