Principal Issues: Whether "registered securities dealer" in Article XXIX A(3) should be limited to the definition under ITA 248(1).
Position: No, a broader meaning should apply.
Reasons: The context of Article XXIX A(3) requires a broader meaning to be applied.
Re: Article XXIX A(3) of the Canada-United States Income Tax Convention
Question
Can CRA confirm that in determining whether a U.S. resident is entitled to the benefits of the Canada-United States Income Tax Convention ("the Treaty") under Article XXIX A (3), the term "registered securities dealer" should not be limited to its meaning as set out in subsection 248(1) of the Act? Would CRA agree that an entity that is regulated under Canadian or U.S. laws in its conduct of a business of trading or dealing in securities on behalf of others would be a "registered securities dealer" for the purposes of Article XXIX A(3)?
CRA Response
Paragraph 3 of Article XXIX A of the Treaty provides as follows (underlining added):
Where a person is a resident of a Contracting State and is not a qualifying person, and that person, or a person related thereto, is engaged in the active conduct of a trade or business in that State (other than the business of making or managing investments, unless those activities are carried on with customers in the ordinary course of business by a bank, an insurance company, a registered securities dealer or a deposit-taking financial institution), the benefits of this Convention shall apply to that resident person with respect to income derived from the other Contracting State in connection with or incidental to that trade or business (including any such income derived directly or indirectly by that resident person through one or more other persons that are residents of that other State), but only if that trade or business is substantial in relation to the activity carried on in that other State giving rise to the income in respect of which benefits provided under this Convention by that other State are claimed.
The term "registered securities dealer" is not defined in the Treaty. Paragraph 2 of Article 3 of the Treaty provides as follows:
As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires and subject to the provisions of Article XXVI (Mutual Agreement Procedure), have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.
The Technical Explanation to the Fifth Protocol provides the following guidance:
The General Note provides that for purposes of paragraph 2 of Article III, as regards the application at any time of the Convention, any term not defined in the Convention shall, unless the context otherwise requires or the competent authorities otherwise agree to a common meaning pursuant to Article XXVI (Mutual Agreement Procedure), have the meaning which it has at that time under the law of that State for the purposes of the taxes to which the Convention apply, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.
Subsection 248(1) of the Income Tax Act defines "registered securities dealer" for the purposes of the Act as follows:
"registered securities dealer" means a person registered or licensed under the laws of a province to trade in securities, in the capacity of an agent or principal, without any restriction as to the types or kinds of securities in which that person may trade;
The CRA's view is that, in interpreting and applying the term "registered securities dealer" in paragraph 3 of Article XXIXA of the Treaty, the context requires that the term to be given a broader meaning for treaty purposes than the definition of the term provided under subsection 248(1) of the Income Tax Act. The narrower view - that the meaning should be limited to the Income Tax Act definition - would make the relief provided under paragraph 3 unavailable to securities dealers that are resident in the United States but not registered or licensed under the laws of a Canadian province. The context of paragraph 3 suggests that the term "registered securities dealer" was intended to identify a class of securities dealers that is duly regulated in either Canada or the United States.
For the purposes of Article XXIX A(3) of the Treaty, the CRA will therefore interpret the term "registered securities dealer" to mean:
- a "registered securities dealer" for the purposes of the Income Tax Act (Canada), or
- a "dealer in securities" for the purposes of Section 475 of the Internal Revenue Code and whose dealings as such are regulated under U.S. federal or state-level securities legislation.