The capital gain realized by a resident of Canada ("Canco") on disposing of shares of a Brazilian company was taxed by Brazil in accordance with Art. 13 of the Canada-Brazil Treaty. Art. 22, para. 2 provides:
[W]here a resident of Canada derives income which, in accordance with the provisions of this Convention, may be taxed in Brazil, Canada shall allow as a deduction from the tax on the income of that person, an amount equal to the income tax paid in Brazil, including business-income tax and non-business-income tax. The deduction shall not, however, exceed that part of the income tax as computed before the deduction is given, which is appropriate to the income which may be taxed in Brazil.
CRA stated:
"[I]ncome" in paragraph 2… includes taxable capital gains. Therefore…Canco can claim a deduction from tax for any income or profits tax paid to the government of Brazil in respect of the Capital Gain. This deduction from tax would be computed independent of the provisions of section 126 of the Act; however ... the deduction from tax will be limited to the amount of Canadian income tax otherwise payable on that Capital Gain.