8.2.2[a] Article VIII(1) – Profits from International Traffic
Article VIII [1] provides a very broad exemption from Canadian income taxation for profits and gains by a U.S. resident from, respectively:
1 – The operation of ships or aircraft in international traffic; or
2 – From the disposition of ships, aircraft or containers (including related equipment), provided that these properties are used principally in international traffic. An additional rule in Article VIII (6) exempts from Canadian taxation rental payments received by a U.S. resident for the use of containers in Canada, where the duration of the use is not expected to exceed 183 days in any 12-month period.
3 – Article VIII (1) provides an exemption to a U.S. resident only where particular income derives from the operation of a ship or aircraft in international traffic.
8.2.2 [b] Article VIII (2) – Definition of Profits From the Operation of Ships or Aircraft
Article VIII (2) provides the extended definition of what constitutes profits derived by a resident of a Contracting State from the operation of ships or aircraft in international traffic for the purposes of the Treaty, including the exemption in Article VIII (1).
According to Article VIII (2), the profits derived by a U.S. resident from the operation of ships or aircraft in international traffic include, but are not limited to, the following items of income:
1 – Profits from the rental of ships or aircraft operated in international traffic.
2 – Profits from the use, maintenance or rental of containers and related equipment used in international traffic.
3 – Profits from the rental of ships, aircraft, or containers (including related equipment), even if not operated in international traffic, provided that such profits are incidental to the profits referred to in Article VIII (1) and paragraph (2) (a) and (b) of Article VIII (2).
8.2.2 [c] Article VIII [3] – Profits from Domestic Transportation
Article VIII (3) complements Article (1) and clarifies the circumstances where the income derived by a U.S. resident from international shipping may be subject to Canadian income taxation.
Article VIII (3) is limited only to the profits earned from the operation of ships in inland transportation and does not extend to the operation of aircraft or any other means of international transportation.
The profits derived by a U.S. resident from inland transportation between two points in Canada by aircraft may be subject to Canadian tax, but only if such profits are attributable to a permanent establishment maintained by the U.S. resident in Canada.
8.2.2 [d] Article VIII [4] – Profits from Transportation as a Common or Contract Carrier
Article VIII exempts from Canadian taxation profits of a U.S. resident engaged in the operation of motor vehicles or a railway either as a common or a contract carrier, where the profits have derived from:
1 – The transportations of passenger or property between a point outside Canada and any other point, including a Canadian destination; or
2 – The rental of motor vehicles including trailers or railway rolling stock, or the use, maintenance or rental of containers used to transport passengers or property between a point outside Canada and any other destination.
Article VIII (4) may apply to exempt profits earned by a U.S. common carrier even where it carries its international transportation business through a permanent establishment in Canada.
No exemption under Article VIII (4) is available where a person deriving profits or rental income for the use of property described in Article VIII (4) is not a common or contract carrier.
Article VIII (4) does not exempt from Canadian taxation the gains from the disposition of motor vehicles and railway rolling stock used by a U.S. resident in the course of international transportation in Canada.
8.2.2 [e] Article VIII [5] – Pool Transportation Arrangements
Article VIII (5) clarifies that the exemptions from Canada income tax granted to U.S. residents pursuant to Articles (1), (3) and (4) may also apply where profits or gains described in these provisions were derived by a resident of a Contracting State from the participation in a pool, a joint business or an international operating agency.
8.2.2 (f) Article VIII (6) – Rental Payments Received in the Course of International Transportation
Article VIII (6) complements the provisions of Article VIII (4) and provides exemption from Canadian income tax for profits derived by a U.S. resident from a short-term use, maintenance, or rental of railway rolling stock, motor vehicles, trailers, or containers in Canada. The exemption in Article VIII (6) applies only where these transportation assets have been used in Canada for a period not expected to exceed 183 days in the aggregate in any 12 – month period or where the profits are not attributable to a permanent establishment in Canada.
References:
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell