The Supreme Tax Court has held that the Canadian double tax treaty of 1981 - in force up to 2000 - does not make treaty exemption dependent upon actual taxation in the other state.

The case before the Court concerned a Canadian national resident in Germany and employed by the Canadian embassy as a local hire. She claimed treaty exemption for her salary on the grounds of a (still current) treaty provision that salaries paid by public funds to residents of the other state are not taxable there if paid to nationals of the state of payment. Canada, on the other hand, had exempted her from Canadian tax, presumably because she did not have the status of a diplomat or civil servant. The tax office claimed German tax on the salary, saying that the Supreme Tax Court had previously held the treaty provision that income received by a resident of one state should rank as being from a source in the other state if it had been taxed there in accordance with the treaty was in effect a "subject to tax" clause.

The Court sided with the taxpayer, saying that it no longer held to its previous standpoint. Neither the wording nor the context of the treaty provision cited allowed the converse conclusion to be drawn that if income was not taxed in the state of source, it should be seen as arising in the state of receipt. The provision in the protocol to the treaty ruling that double taxation should be relieved by credit rather than exemption where there was a conflict of qualification, also could not be applied here. In the present case there was no conflict as to the source, nature or classification of the income; Canada's choice not to tax the income of one of her citizens did not give Germany the right to levy her own tax instead.

The 1981 German/Canadian treaty is no longer in force. It has been replaced by the treaty of 2001 with effect from the beginning of that year. The 2001 treaty no longer contains the misconstrued clause deeming income to have been sourced from the state where it was taxed, although it does still have the same protocol resolution of conflicts of qualification. The present Supreme Tax Court ruling would therefore seem to have kept its relevance.

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