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M. Trotier (613) 957-8953
January 19, 1989
Dear Sirs:
Re: XXXX "Canada-United Kingdom ("U.K.") Income Tax Convention (1978) ("Treaty")
This is in reply to your letters of August 1 and 2, 1988 concerning a situation where a U.K. subsidiary of the Bank ("Subsidiary") deposits funds, earned in the course of carrying on its U.K. operations, with the Bank's U.K. branch ("Branch"). You have requested our views as to whether the provisions of the Treaty will exempt from tax exigible under Part XIII of the Income Tax Act ("Act") interest paid with respect to the funds on deposit from the Branch to the Subsidiary.
We emphasize that our comments that follow are intended to be general and may not be appropriate with respect to specific facts of a particular situation.
Paragraph 2 of Article 11 of the Treaty provides that interest arising in one of the Contracting States and paid to a resident of the other Contracting State may be taxed in the Contracting State in which it arises. By virtue of paragraph 7 of Article 11 of the Treaty, the interest paid by the Branch in the above example would be deemed to arise in the U.K. with the result that paragraphs 1 and 2 of that Article would not be applicable. Accordingly the interest payments would ordinarily be subject to tax under Part XIII of the Act. We can advise you that our Competent Authority has taken the position in the situation described above that it would be our practice to remove the Part XIII tax on the interest in Canada by invoking the provisions of Article 23 of the Treaty.
While the position taken by our Competent Authority will, generally, continue to apply in circumstances where paragraph 7 of Article 11 applies, our Competent Authority would want to consider any particular situation that may be structured to take undue advantage of this position.
We trust these comments will be of assistance.
Yours truly,
for Director Financial Industries division Rulings Directorate