12 December 2000 External T.I. 2000-0017405 - tax credit on foreign dividends

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.

Principal Issues: Whether a foreign tax credit can be claimed on the franked dividend in respect of the underlying Australian taxes paid by the Australian corporation paying the dividend.

Position: No

Reasons: The law

XXXXXXXXXX 2000-001740

Attention: XXXXXXXXXX

December 12, 2000

Dear Sir\Madam:

Re: Tax Credit on Certain Foreign Dividends

This is in reply to your facsimile of March 29, 2000 in which you requested our opinion whether a Canadian resident taxpayer may claim a foreign tax credit under subsection 126(1) of the Income Tax Act (the "Act") on certain dividends received from Australian corporations.

In your letter you describe a situation where a taxpayer resident in Canada receives a "fully franked dividend" from a corporation resident in Australia. You indicate that such dividends are exempt from the Australian non-resident withholding tax because Australian income taxes have already been paid on the distributing corporation's profits at the corporate level. You indicate that a taxpayer resident in Canada would ordinarily be entitled to claim a foreign tax credit in Canada if Australian withholding tax was paid in respect of such foreign source income. Your question is whether a foreign tax credit may be claimed for the underlying Australian taxes paid by the distributing corporation on a fully franked dividend.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.

It is our general understanding that under Australian tax law where a dividend is paid by an Australian resident public corporation out of profits that have borne a certain level of corporate tax such dividends are referred to as "franked dividends". We understand that each franked dividend carries an imputation tax credit that relates to the fact that a certain amount of underlying corporate tax on the distributed profits has been paid and that dividends can be fully franked or partly franked. Generally, in the case of a natural person who is resident in Australia the amount of a franked dividend is included in their income for the year for Australian income tax purposes and that the imputation tax credit is credited against their income tax otherwise payable for the year or in some cases refunded. Australia's dividend tax credit imputation system is somewhat similar (but not identical) to our own whereby the dividend tax credit (available to individuals who receive taxable dividends) theoretically recognizes that tax at the corporate level may have been paid on the distributed profits.

We also understand that where a person who is a non-resident of Australia receives a franked dividend no portion of the imputation tax credit can be refunded. However, where a fully franked dividend is paid to a non-resident, under Australian tax laws there is no obligation to deduct any non-resident withholding tax. If the dividend is only partly franked, or is not franked at all, the non-resident withholding tax only applies to the portion of the dividend that is not franked.

The treatment of franked dividends under the tax laws of Australia has no effect on how these amounts are treated for Canadian income tax purposes. Under subsection 90(1) and paragraph 12(1)(k) of the Act a taxpayer resident in Canada will be required to include all such dividends in their world-wide income. For the purposes of computing the taxpayer's foreign tax credit that may otherwise be available on such foreign source income under subsection 126(1) of the Act, the amount of the Australian imputation tax credit (i.e., the amount of the Australian tax paid by the Australian corporation on its profits which are distributed as a franked dividend) is not a tax paid by the Canadian resident taxpayer to the Australian government nor can such an amount reasonably be considered to have been withheld and remitted by the Australian corporation on account of the recipient's Australian tax liability. Moreover, there is nothing in the terms of the Canada-Australia Income Tax Convention that would suggest or otherwise require that Canada allow a foreign tax credit for such amounts.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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