9 January 1995 External T.I. 9426415 - DEEMED DIV. REC'D BY ESTATE AND PAYMENT TO NON-RES.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

				942641

XXXXXXXXXX		C.R. Bowen

Attention: XXXXXXXXXX

January 9, 1995

Dear Sirs\Mesdames:

Re: Income of Estate

We are writing in reply to your letter of October 11, 1994 concerning the application of paragraphs 104(6)(b) and 212(1)(c) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your letter.

In your letter you outlined a series of transactions that appear to have been undertaken in a particular fact situation. While we can not provide comments on that situation, we will offer the following general comments which may be of assistance to you.

The will of a deceased taxpayer and/or the relevant laws of the applicable province will determine whether the executor of the estate of a taxpayer who was a resident of Canada has the right to sell the property of the estate and distribute the cash to the beneficiaries of the estate or to simply distribute the property to the beneficiaries. Where prior to the winding up of an estate, the executor winds up a corporation resident in Canada of which the estate is a shareholder, the amount distributed by the corporation to that estate on the winding up of the corporation will be subject to subsection 84(2) of the Act. Under that provision, there will be a deemed dividend received by the estate to the extent that the amount or value of the funds or property distributed to the estate exceeds the paid-up capital of the shares of that corporation that were owned by the estate. In the event that the corporation has amounts described in subparagraphs 88(2)(a)(i) to (iii) of the Act, elections under paragraph 88(2)(b) of the Act may be available in respect of that deemed dividend (refer to Interpretation Bulletin 149R4).

Assuming that such a deemed dividend received by the estate (hereinafter referred to as a trust having regard to subsection 104(1) of the Act) is a taxable dividend, it will be grossed up in accordance with paragraph 82(1)(b) of the Act and included in the income of the trust for income tax purposes unless all or part of that amount is deducted from the trust's income in accordance with paragraph 104(6)(b) of the Act. Subject to subsection 104(7) of the Act, paragraph 104(6)(b) of the Act permits a trust to deduct in computing its income for a taxation year an amount that would be its income for the year as became payable in the year to a beneficiary. Pursuant to subsection 104(24) of the Act, an amount is not considered to have become payable unless it is paid in the year to the beneficiary of the trust or the beneficiary was entitled in the year to enforce payment of the amount. As indicated in paragraph 34 of Information Circular 77-16R4, any part of an amount that becomes payable by a trust in its taxation year to a non-resident beneficiary and that would be included in the beneficiary's income under subsection 104(13) of the Act if Part I were applicable, is deemed by paragraph 214(3)(f) of the Act to be trust income paid or credited to that beneficiary on the earlier of the dates set out therein. Consequently, such an amount paid or credited to a non-resident beneficiary in respect of the deemed dividend received by the trust will be subject to Part XIII tax under subparagraph 212(1)(c)(i) of the Act. Therefore, non-resident withholding tax at a rate of 25% (unless the rate is reduced in accordance with a bilateral tax treaty) of the amount paid or credited must be withheld by the trust.

Alternatively, if all or part of the deemed dividend received by the trust is a capital dividend pursuant to subsection 83(2) of the Act, the capital dividend will not be income of the trust under Part I of the Act. However, as stated in paragraph 36 of Information Circular 77-16R4, where an amount paid or credited by a trust to a non-resident beneficiary may reasonably be considered to be a distribution of a capital dividend received by the trust on a share of the capital stock of a corporation resident in Canada, that amount is subject to Part XIII tax under subparagraph 212(1)(c)(ii) of the Act.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch