29 August 1989 Income Tax Severed Letter AC58462 - "Gains" under Canada-U.S. Income Tax Convention

19(1)                         5-8462
                                   K.B. Harding
                                   (613) 957-2129

Dear Sirs:

This is in reply to your letter of July 28, 1989 where you requested our views on the word "gains" as used in Article XIII of the Canada-U.S. Income Tax Convention (the "Convention").

It is our view that where an income tax convention or agreement uses the word "gains" it is referring to a capital gains otherwise the term income, business profits or some other specific type of income is generally referred to.

When interpreting a passage of a tax agreement or convention which is not clear, the Income Tax Conventions Interpretations Act (the "Interpretations Act") permits the interpreters to review the background papers and the intention of the negotiators when drafting the tax agreement or convention. The Department of Finance confirmed with us that Article XIII was intended to apply only to capital gains. In addition, the Convention was patterned on the OECD model and Article 13 clearly indicates that it is only applicable to capital gains.

The Interpretations Act also provides that specific provisions of an income tax agreement or convention override a general provision. As an example, amounts that constitute income from real property which fall within the specific provisions of Article VI of the Convention could not fall within Article XIII of the Convention as the income from real property provision is more specific. Accordingly, all income from real property, including recapture of capital cost allowance clearly falls within Article VI of the Convention.

Since most other types of income included in the Convention are considered as income rather than gains and since these specific provisions override the general provisions of Article XIII, it would appear that only capital gains for income tax purpose would qualify as "gains" for purposes of the Convention.

We trust this is adequate for your purposes.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch