6 March 1990 Ruling HBW4125J1 F - Canada-Japan Income Tax Convention

March 6, 1990

19(1)

Pursuant to paragraph 3 of Article 23 of the Canada-Japan Income Tax Convention signed by our two countries on May 7, 1986, we would like to clarify the application of the said Convention to charitable and other non-profit organizations which are exempt from tax in the country of residence.

Although, for the purposes of the convention, the term "resident of a Contracting State" is defined in Article 4 to mean "any person who, under the laws of that Contracting State is liable to tax therein...", it is our view that it was not intended that exempt organizations be denied the benefits of the Convention. We feel that the opposite view would result, for example, in a form of "reverse" tax sparing in that the source country would effectively be taking away through a higher withholding rate part of the incentive being provided by the country of residence.

Therefore, in our capacity as the competent authority for Canada, we seek to clarify that exempt organizations are "residents of a Contracting State" as defined in Article 4 of the Convention, on the basis that such organizations are effectively liable to tax in the country of residence, in that , a failure on an exempt organization's part to meet all the conditions provided for in the domestic tax legislation of the residence country, would normally render the organization taxable.

If you are prepared to accept the foregoing proposal, this letter and your letter confirming our position will be regarded as constituting an official agreement between competent authorities on this matter.

Yours sincerely,

C. SavageA/DirectorProvincial and International Relations Division

c.c.       Jacques Sasseville      Department of Finance

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