A resident of France was awarded compensatory benefits by order of the applicable French court on her divorce from her husband, consisting of a lump sum (payable in two instalments, separated by a year) and a life annuity payable on a monthly basis. She became a resident of Canada. Withholding tax was levied by the French tax authorities on the life annuity but not on any portion of the lump sum.
CRA found that the lump sum was a capital sum that was not includible in her income, but that the life annuity was includible in her income as a support amount.
CRA referred to Art. 18(4) of the Canada-France Convention, which provided:
Alimony and other similar payments arising in a Contracting State and paid to a resident of the other Contracting State who is subject to tax therein in respect thereof, shall be taxable only in that other State.
It found that since the life annuity (but not the lump sum) was treated under Canadian domestic tax law (s. 56.1(4)) as a taxable support amount, Art. 3(2) of the Convention deemed it to be amounts referred to in Art. 18(4), so that Canada had the exclusive right to impose tax thereon.