- 35 -
paragraph (2) is correct. The extrinsic evidence and the Model
Treaty and Commentaries, on which the Canadian Convention is
based in part, support that construction. The Senate's
preratification materials to the Convention do not ascribe a
different meaning to the separate-entity language of Article VII,
paragraph (2). See S. Exec. Rept. 98-22, 20 (1984). Moreover,
it is consistent with the approach historically taken by the
United States and Canada. Art. III(1) of the Convention on
Double Taxation, Mar. 4, 1942, U.S.-Can., T.S. No. 983, 56 Stat.
1399.11
While the Treasury's interpretation, set forth in the
Technical Explanation, is particularly persuasive in light of the
fact that the Canadian Department of Finance has generally
accepted the Technical Explanation as an accurate portrayal of
the understandings and context in which the Convention was
negotiated, see ALI Project, 18 (1992); Canadian Department of
Finance, Rel. No. 81-6 (Feb. 4, 1981), we think that respondent
11Art. III(1) in the second income tax convention with
Canada signed in 1942 provided in pertinent part:
1. If an enterprise of one of the contracting
States has a permanent establishment in the other
State, there shall be attributed to such permanent
establishment the net industrial and commercial profit
which it might be expected to derive if it were an
independent enterprise engaged in the same or similar
activities under the same or similar conditions. Such
net profit will, in principle, be determined on the
basis of the separate accounts pertaining to such
establishment. * * *
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