A Canadian-resident individual (the “Taxpayer”), wholly owns a U.K.-resident corporation which, in turn, wholly-owns an Australia-resident holding Australian real property. A capital gain realized by the individual on a sale of the UK corporation is subject to Australian, but not U.K., income tax. Can the individual treat the gain as being from an Australian source for Canadian foreign tax credit purposes? CRA stated:
As the facts provide that the value of the UK corporation’s shares is wholly derived from real property in Australia, pursuant to paragraph 4 of Article 13 of the [Canada-Australia] Treaty, the gain realized by the Taxpayer on the disposition of the shares of the UK corporation may be taxed in Australia.
Paragraph 2 of Article 22 (Source of Income) of the Treaty provides that for the purposes of Article 23 (Elimination of Double Taxation) and the law of Canada, profits, income or gains of a resident of Canada which are taxed in Australia in accordance with Article 13 of the Treaty shall be deemed to be income from sources in Australia. This paragraph would therefore apply to deem the capital gain realized by the Taxpayer on the disposition of the shares of the UK corporation to be income from sources in Australia for purposes of Article 23 and the Act.
In general terms, pursuant to subparagraph 2(a) of Article 23 of the Treaty, Canada shall provide a foreign tax credit for taxes payable in Australia on profits, income or gains from sources in Australia, subject to the existing provisions of the law of Canada. Therefore … the Taxpayer would be eligible to claim a foreign tax credit … [whose] amount … would be determined based on the computational rules of section 126 ... .