http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/217930/index.do
Société Générale Valeurs Mobilières Inc. v. Canada (January 10, 2017 - 2017 FCA 3, Pelletier, Stratas, Woods (Author), JJ. A.)
Précis: Here the taxpayer was arguing that the specific language of the “tax sparing provision” found in Article XXII(2) of the Canada-Brazil Tax Convention provided a tax credit in Canada on the amount of the gross bond interest taxable in Brazil, not the next interest actually taxed in Canada.
The Tax Court ruled that the credit only applied to the net income subject to tax in Canada. The Federal Court of Appeal dismissed the appeal from the bench with costs to the Crown both in the Court of Appeal and the Tax Court.
Decision: In the Tax Court, Justice Paris permitted the application but did not provide the taxpayer with the answer it had been looking for:[1]
Upon the respondent bringing a motion for determination, before hearing, of the following questions of law pursuant to subsection 58(1) of the Tax Court of Canada Rules (General Procedure):
Where a Canadian resident taxpayer earns bond interest income arising in Brazil that may be taxed by Brazil under Article XI of Canada’s tax treaty with Brazil, and earns taxable income from other sources, is the amount of Canadian income tax that is referred to in Article XXII(2) of the treaty as being “appropriate to the income which may be taxed in Brazil”:
a. equal to the Canadian income tax on the amount of such interest income that is or is deemed to be taxed in Brazil, which is a gross amount; and
b. if the answer to a. is yes, what is the proper test for determining the Canadian income tax payable on the gross amount of income derived from Brazil;
c. if the answer to a. is no, what is the proper test for determining which amounts of the Canadian resident taxpayer should be included and/or deducted from the gross income arising from sources in Brazil?
And upon having heard the submissions of counsel and having read the materials filed;
The motion is allowed and the above questions are answered as follows:
Question 1: No. The amount of Canadian income tax referred to in the second sentence of Article XXII(2) of the Treaty as being “appropriate to the income which may be taxed in Brazil” is the actual Canadian income tax attributable the income taxed in Brazil, which is computed on the net income arising from Brazil.
Question 2: Not applicable
Question 3: The proper test for determining which amounts of the Canadian resident taxpayer should be included or deducted from the gross interest arising from sources in Brazil is that found in subsection 4(1) of the Income Tax Act.
The taxpayer appealed to the Federal Court of Appeal but the Court dismissed the appeal from the bench.
[4] The specific questions before Tax Court concerned the calculation of the Canadian foreign tax credit. In particular, did the relevant Treaty provision require Canada to provide a foreign tax credit calculated by reference to Canadian tax on gross income?
[5] The specific questions are reproduced below:
Where a Canadian resident taxpayer earns bond interest income arising in Brazil that may be taxed by Brazil under Article XI of Canada’s tax treaty with Brazil, and earns taxable income from other sources, is the amount of Canadian income tax that is referred to in Article XXII(2) of the treaty as being “appropriate to the income which may be taxed in Brazil”:
a. equal to the Canadian income tax on the amount of such interest income that is or is deemed to be taxed in Brazil, which is a gross amount; and
b. if the answer to (a) is yes, what is the proper test for determining the Canadian income tax payable on the gross amount of income derived from Brazil;
c. if the answer to (a) is no, what is the proper test for determining which amounts of the Canadian resident taxpayer should be included and/or deducted from the gross income arising from sources in Brazil?
[6] The relevant provision is the second sentence of Article XXII(2) of the Treaty, which reads: “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.”
[7] The context provided to the judge to answer these questions was a simple statement of hypothetical facts agreed to by the parties. These are:
1. A Canadian resident taxpayer earns bond interest income which arises in Brazil.
2. The bond interest may be taxed by Brazil under Article XI of the Treaty.
3. The taxpayer earns income from other sources that is taxable in Canada.
4. The taxpayer is deemed by Article XXII(3) of the Treaty to have paid Brazilian tax equal to 20 percent of the gross bond interest arising in Brazil.
Justice Woods found no reversible error:
[11] In this Court, Société Générale submits that the judge’s interpretation of the Treaty should be rejected because it is inconsistent with the clear language of the provision. It also submits that, if the judge’s interpretation were correct, the drafters of the Treaty would have used the language that was used in many other treaties.
[12] We disagree with these submissions. In our view, the judge’s interpretation is more consistent with the language of the relevant provision. In particular, the judge is correct that the ordinary meaning of the text takes into account not only the gross income which may be taxed by Brazil, but also the actual Canadian tax as computed under the Income Tax Act, which is based on net income.
[13] The interpretation by the judge is the one that is most consistent with the text, the context and the purpose of the provision.
[14] Finally, we acknowledge that the text of the Treaty may be different from many of Canada’s other treaties. However, in these circumstances this is not a reason in and of itself to give the provision a different interpretation.
Thus the appeal was dismissed with costs both in the Federal Court of Appeal and in the Tax Court.